Q2 – 2019 Quarterly Report

 

McFarthest Spot

There are over 14,000 McDonalds in the lower 48, simple math would tell us there are roughly 290 per state.  Take a drive and I am sure you will see a few in your travels.  The McFarthest Spot happens to be in Tonopah, Nevada.  It is the farthest distance you will travel between two McDonalds; 135 miles of driving or 120 as the crow flies.  When you Google McFarthest spot you will find page after page of articles, blogs, and videos.  One blog discusses the closure of one McDonalds which increased the distance to the McFarthest Spot.  On the map below you will see Tonopah with the orange star.

We are off to a great start to the year, having a great McQuarter.  The positive first quarter was not without some down days, but the McFarthest spot from the end of 2018 seems quite a distance.  When markets correct like they did in the final quarter of 2018, a pop like we had in the first quarter of 2019 is not all that unusual.

Markets

The quarter was led by REIT’s as we saw interest rates drop.  Real estate and interest rates tend to have an inverse relationship.  Domestic stock indices enjoyed double-digit returns, while international assets were in the high single digits.  Again, no surprise the market snapped back as 2018 finished with the worst yearly losses since 2008.  The Brexit “can” was kicked from the March 29th deadline, the 100th straight month of increased employment, small business hiring broke its past record and the Fed kept rates steady.  All these lead investors to believe the threats of last year are out in the distance.

Fixed Income

It is not a big surprise the Fed left rates unchanged as the bond market has been saying that for some time.  In fact, the bond market is suggesting a rate reduction this year (see chart below). Not only is the bond market suggesting a reduction in rates, but so is prior Fed Chair Janet Yellen as well as Economic Advisor Larry Kudlow. 

The chart below illustrates the downdraft in the 10 and 2-year Treasury yields since October of 2018.  Mortgage rates also dropped dramatically, possibly extending a gift to the slowing housing market.

With interest rates dropping as we go out along the interest rate curve, many are watching the inversion of 2 over 10-year yields.  Has the McFarthest spot shrunk on the next recession?  During chairman Powell’s news conference, he noted that part of the Fed’s decision to hold rates steady was a noted slowdown in consumer spending as well as a slowdown in business investing.  Is the Fed concerned with the economy’s growth, or are we at their perfect equilibrium…we shall see?

US interest rates are low, but compared to others, we are the “cleanest dirty shirt.”  Looking below at German rates you will see they offer actual negative yields.  You lend your money to the German government and you will receive less at the end of the term.  US yields look downright stunning compared to German Bunds. 

United States Yield Curve

German Yield Curve

What then

If the markets were to drift sideways from this point forward, it would be a great year.  We do not anticipate that happening, but we do think pieces are in place for a good year.  Rates are low, as are inflation and unemployment.  Could there be disruptors?  Absolutely. The Fed should not be a factor, but trade could be. There is progress on trade talks as of last week, so that is good.  We do not like the shape of the yield curve.  Could this time be different?  Possibly, but it is worth watching.  The Fed is seeing some disruptions in the economy, so we will be cautious also.  As they say, “adventure may hurt you, but monotony will kill you.”  As we traverse through these markets to our Spot, let’s remember the line is not always straight.

Enjoy your April, and we look forward to speaking with you over the next couple of weeks.

Sincerely,

Disclosures

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 Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2019 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 2019, all rights reserved. Bloomberg Barclays data provided by Bloomberg.  Yield source: ICE BofAML government yield. ICE BofAML index data © 2019 ICE Data Indices, LLC. The S&P 500 Index is a free-float market capitalization weighted index of 500 of the largest US companies. This index is calculated on a total return basis with dividends reinvested and is not available for direct investment. 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.

 

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