The joint investment committee of Horizon and Impel Wealth Management met on Monday, November 5th, on the eve of the midterm elections. There certainly have been a number of issues that have caused volatility and selling in stock markets around the world over the last 30 days since our October meeting. These include:
1) Trade/Tariffs Issues- Trade issues have been front and center on the global economic stage this year. There has been significant progress made on a trade agreement with Europe, and a new North American trade agreement has been reached between United States, Mexico, and finally Canada. We also have a new trade agreement with South Korea and have made good progress and trade discussions with Japan. However, trade tensions and a stand-off with China seem to be causing fear and concern for the global economy.
2) Rising Interest Rates- The Federal Reserve Bank continues its course of normalizing monetary policy. This includes raising short term interest rates, while simultaneously allowing the runoff of its balance sheet. This has increased borrowing costs, caused the dollar to rise and put pressure on emerging markets economies.
3) Upcoming Midterm Elections- Markets tend to hate uncertainty. Tomorrow's midterm election has provided plenty of this. We will soon know the outcome of the elections, and, regardless of which party controls the House and Senate, we will at least have a lens through which to view the US political landscape. From a historical basis, this year's market performance has tracked very similarly to past midterm election years. Since 1931, markets have historically risen in the six months and one-year time period after a midterm election, regardless of which party has won. I have attached two charts that will give some visual story around this pattern.
Against this backdrop, we have seen, for the second time this year, a drop of 10% or more in the US stock markets. It has been worse globally as international markets have suffered more than US markets during this time. We have seen slowing growth in China and Europe, and the rising dollar has caused market declines to be more pronounced globally. Through late October, international developed markets have lost nearly 15% year to date, while emerging markets have lost closer to 20% this year.
As we have stated numerous times in our monthly investment committee notes, the current economic expansion is now the second longest in modern US history. There have certainly been signs that the economic expansion is aging and entering into its latter stages. This includes a pickup in volatility and inflation pressures due to rising commodity input costs, and more importantly due to rising wage pressures as unemployment hits a nearly fifty year low. All of this has caused the Fed to continue raising interest rates to protect the economy from overheating and inflation.
GDP numbers, corporate earnings and the index of leading economic indicators continue to be relatively strong. However, if this were a nine-inning baseball game, there are signs that we are likely in the seventh or eighth inning of the game. Therefore, as we have communicated with you throughout the year, we have taken steps to reduce risk and volatility in our portfolios. This has included reducing stock market exposure, adding lower volatility versions of certain asset classes, and the addition of asset classes that tend to do well in rising inflation and rising interest-rate environments. In late 2017 we were proactive in raising cash for clients who are taking monthly distributions for their annual RMD's. In August and September when markets were at all-time highs, our investment committee pared holdings and raised cash. This money will be used to cover cash needs for clients in retirement. For clients still in the accumulation phase of life, many of you will notice that we have used the late October pullback in the market to buy back in at lower prices.
We wanted to remind you of the steps that have been taken to help manage risk and volatility in your portfolios as you observe the swings in the stock market online, or on the 24/7 cable news networks. It is easy to get distracted from your long-term financial goals by the daily news and noise of the media. Please remember that the events of a few days or weeks will likely have little impact on your financial plans over the course of your lifetime.
We trust that these thoughts will provide some perspective on what we are experiencing in the markets today. Please let us know if you have further questions going forward about your particular situation. As always, we are here to help you our friends and clients. We are anxious to "Move Life Forward" for all of us together.
