August is a time when the days get shorter and the weather starts to get a little cooler. It is also a time when football rankings begin to get published and talks of national championships or Super Bowl contenders occupies various sports shows. And while people love to talk about how much a quarterback is getting in guaranteed money, or how much a running back gets when he hangs out in Cabo, the real secret to a team’s success is summed up in one word: DEFENSE.
Like football, good investing has a component of defense; we just call it diversification. If one got defensive in July, it would have helped investors produce touchdown-like returns (or a field goal at least). During August, the 10-year Treasury getnerated 4.84% in returns, due largely to an inverting yield curve. Other Fixed Income indices also did well: the Corporate Bond Index was up 2.59% , and High Yield was up a quarter of one percent (73 basis points).
Equity funds did not fare as well during August as the run-and-gun offense of Large Caps did nothing at the line of scrimmage; instead they lost yardage. Small Caps were no better, with the Russell 2000 losing over 5% in the month. Even with this loss of offense, Equities are still ahead by a touchdown. Now, as investors discuss things slowing (globally), it seems that a good coach should begin to look to other parts of his play calling to secure the win.
At the end of August, a number of indicators were showing signs the economy is facing headwinds. These include: An Inverted Yield Curve (this is an occurrence when the 2-year Treasury yield is greater than the 10-year Treasury yield) Slowing GDP growth (most recent quarterly numbers are 2%, down from first quarter’s number of 3%), Earnings Growth (estimates for the S&P 500 earnings growth have moved from 7.5% growth to 2.5% growth), and Lower Manufacturing (the PMI index is below 50. Anytime it falls below 50, it is a signal of contraction). Lastly, this morning, September 6th, the Jobs Report came in weaker than expected for the month of August; nonfarm payrolls increased 130,000, below estimates of 150,000. The pace of job creation has slowed and wage inflation has remained flat. Thus, the Fed is concerned that the economy is starting to slow and will need to keep rates lower in order to keep the economy sustainable at these levels.
As Powell stated, the economy has been steadily moving along the Fed’s desired levels with the Gross Domestic Product in line at 2% and unemployment is just under 4%. Consumers continue to spend-- a driving force of the United States’ economy--but inflation remains below the desired level of 2%. Businesses tend to disagree with Powell’s opinion of the economy and believe that trade policies as well as the current state of the global economy will negatively impact the health of the United States’ economy.
Putting football analogies aside, Equities in 2019 are up anywhere from 5.8% for Small Cap Value to 22%+ for the Large Cap Growth index; they are still the biggest generators of performance. But Fixed Income is up significantly as well, but with much less volatility. Given the current global environment, investors should begin to look at their current asset allocation and ask the question if they are too overexposed to the stock market and begin to find ways to create defense. Remember December 2018?
The key to remember is that when you are ahead there is not a need to take more risk than necessary. A win, is a win, is a win. Remember, the Patriots don’t always win because of Tom Brady, it is also their defense that can secure the ball. Just ask the Seahawks from 2015! Oh, and who is my pick for this year? You guessed it: The Patriots. Again. Then Tommy Retires.
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