We never intend to be political, but we decided to dive into a recent issue; aluminum. This has been a great debate for many years; which side is better to use for baking, the shiny side or the dull side of aluminum foil. The answer is, it does not matter. According to the Reynolds website, “with standard and heavy-duty foil, it’s perfectly fine to place your food on either side, so you can decide if you prefer to have the shiny or dull side facing out.” The only difference being the foil is “milled” in layers during production. The website states that “milling is a process whereby heat and tension is applied to stretch the foil to the desired thickness. We mill two layers in contact with each other at the same time, because if we didn’t, the foil would break during the milling process. Where the foil is in contact with another layer, that’s the “dull” side. The “shiny” side is the side milled without being in contact with another sheet of metal. The performance of the foil is the same, whichever side you use.” So, there you have it, debate settled.
All kidding aside, we are not implying a lack of concern with the recent tariff threats and what they could lead to. Our belief is that in the end, all sides lose in a trade war. We certainly hope that the threats are a means to get others to the bargaining table. As Trump is quoted in his book, The Art of the Deal, “my style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I am after.” From what we are seeing in the bond market it would appear that bond market participants believe the administration will not push us to an all-out battle, and we hope they are right.
As we have talked about earlier this year, volatility is back. The market generally sees less volatility during times when the Fed is adding liquidity. Once that changes, volatility ensues. The current Fed chief does not seem to be bothered by volatility like Bernanke and Yellen before him. There is no longer the “Greenspan Put” in place. During Greenspan’s tenure, he would reduce the Fed Funds Rate (a put) when a crises arouse. But, those actions by Greenspan were believed to have caused the dot-com bubble burst. In the end, we are actually returning to a more normal market. We rarely see a year like 2017 with the market showing so little effervescence.
Emerging markets were the stand out last quarter as they posted positive numbers. Technology stocks took it on the chin last quarter with Facebook leading the charge. Technology represents a large portion of the S&P 500, so the joy we felt last year with tech surging turned to pain as tech fell. We anticipate continued pressure on tech as there may be heightened pressure to regulate that sector. The top developed markets were Finland, Italy and Singapore with Switzerland, Australia and Canada falling to the bottom. Top emerging markets were Egypt, Brazil and Peru with India, Poland and the Philippines at the bottom.
Interest rates increased in the US during the first quarter. The yield on the 5-year Treasury note rose 36 basis points to end at 2.56%. The 10-year Treasury increased 34 basis points to end at 2.74% and the 30-year Treasury bond rose 23 basis points to end at 2.97%. You will also see in the chart below the short-term rate increase from the beginning of the year with the Fed increasing the overnight rate. The curve is starting to flatten out and we do not see a benefit to extending maturities at this point. The Fed should be making additional moves this year. They do not want inflation to get out of control; such as in Venezuela where they faced a surge of inflation of around 13,000 percent. We hope the Fed does not get overly aggressive as history has shown that once they begin to raise rates, they often go too far. Much like having that last drink, going too far can lead to a hangover. Financial hangovers tend to lead to stalled growth and recession.
The economy is not showing signs of stalling; in fact, it looks pretty healthy. The recent volatility and pull back could actually be beneficial to the current bull market as valuations dip to more attractive levels. The first quarter is over and earning season will be upon us. Thompson Reuters has said that the estimated first quarter year-over-year growth rate is 18.5%. That rate is the highest rate of growth in seven years. All of this positivity is out the window if we are to see a trade war come to fruition or if the Fed goes overboard. Market volatility is unnerving, but it’s a normal part of investing. If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the noise and focus on your long-term goals.
You may have received an email or call from Vanessa regarding our client portal. The portal is a great source for you to review your account as well as your allocation. The portal is also a secured area to upload documents and download documents. If you have not registered for the portal, please reach out to Vanessa at email@example.com
We look forward to speaking with you soon and thank you for your continued support.
Morgan R. Christen, CFA, CFP®, MBA
Chief Executive Officer
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond ex US Market (FTSE WGBI ex USA 1−30 Years [hedged to USD]). S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Bloomberg Barclays data provided by Bloomberg. FTSE fixed income © 2018 FTSE Fixed Income LLC, all rights reserved. Dow Jones data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). One basis point equals 0.01%. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2018 FTSE Fixed Income LLC, all rights reserved. ICE B of AML index data © 2018 ICE Data Indices, LLC. Charts from Dimensional Fund Advisors. Inflation is typically defined as the change in the non-seasonally adjusted, all-items Consumer Price Index (CPI) for all urban consumers. CPI data are available from the US Bureau of Labor Statistics. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s full faith and credit and are exempt from state and local taxes. The indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Vix Chart courtesy of CBoe