Joyful & Mindful: PPA’s Guide to Holiday Gift-Giving

Sam Ngooi Comments

The holiday season is here, and while it may be the “most wonderful time of the year,” holiday shopping can make the season of giving one of the most busy and stressful.  Finding the perfect gift for loved ones can feel next to impossible; according to Harvard Business School professor Michael Norton, “being obligated to give and worrying about how people will react interferes with the happiness we typically feel at the pure act of giving,” (Forbes, 12/12/2017).

While 7 in 10 Americans would skip exchanging gifts if their friends and family would agree, we wanted to share a few ways to make holiday giving a bit more joyful and mindful, without saying “bah humbug” to the custom altogether.

  1. Set Reasonable Expectations

A pre-holiday conversation with people in your gift-giving circle can help align expectations around the number of presents, cost, or type of gifts.  Asking “how do we want to handle gifts this year?” can generate creative gift arrangements, such as pooling money for larger gifts.

  1. Shop Thoughtfully

Retailers spend millions on ploys to get shoppers to spend more. One study found that when stores played holiday music, customers spent 34% more time browsing and were 17% more likely to buy something.  Likewise, one-day sales and limited-time store credit impose a sense of pressure on customers to buy things they might not have felt compelled to otherwise. Recognizing these sales tactics, making and sticking to a list, and using tools to help research the best deals can help you avoid being sucked in.

  1. What Makes a Good Gift?

Research shows that gift recipients are more likely to value an experience or activity as a gift over material objects, due to the enduring memories generated by the experience.  A personal note or token gift (think: a pair of hiking socks in advance of a camping trip) can further enhance the excitement and anticipation that make experiences more appreciated than material gifts.

People also feel happiest when they receive something they’ve asked for, rather than a surprise.  Gifts of the practical, homemade, or time-saving (i.e., services) variety are also well-received, provided some careful observations and considerations are made about the recipient’s likes, wants, and needs.  Finally, charitable gifts on someone’s behalf tend to yield the most happiness when they have a well-defined purpose and a way to report back to donors on their impact.

  1. Get Kids Involved

The holiday season is a great opportunity for families to practice thoughtful gift-giving.  Taking time to discuss the “whys” behind holiday traditions and the feelings elicited by giving and receiving gifts is an effective way to reinforce shared values.  Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, notes that a holiday budget not only allows kids to practice money management, but also allows parents to add parameters to encourage family values, such as matching funds allocated to homemade or philanthropic gifts.

  1. Savor Gratitude

Relishing warm emotions can strengthen positive attitudes in the brain and increase happiness and satisfaction.  Throughout the gifting process, it’s okay to be a little selfish, and enjoy the feeling of making someone you care about feel appreciated. Similarly, it’s worthwhile to savor the experience of gratitude when receiving a gift; communicating your appreciation and acknowledgement for the work that went into the gift spreads the good cheer and strengthens your connection with the gift-giver.

  1. Focus on Values

Reflecting on values and priorities during the holiday season serves as a reminder of what gift-giving is all about: creating special connections and enriching our relationships through caring, kindness, and empathy towards others. Taking time — either individually, with friends, or as a family — to think about this deeper meaning can help refocus the reason behind the rituals of the season.

Wishing you a meaningful, fulfilling, and stress-free holiday season!

Interest Rates and the Current Financial Markets

Sam Ngooi Comments

At the end of October, the Federal Reserve reduced the short-term interest rate it controls by a quarter percentage point (1/4%), the third such decrease during 2019. Ten-year US Treasury yields continue below 2%, although they have now moved higher than the three-month yield, reversing at least for now the so-called “inverted yield curve.” This unusual circumstance describes a time when longer term yields are lower than shorter term yields.

Lower interest rates almost always send bond prices higher, and often are cited as an explanation for rising stock prices. The reasons for these impacts are worth reviewing again as the Fed’s actions on interest rates make headlines (e.g., NYT, 10/31/2019, Page A1).

Bond prices move higher as interest rates decline because the higher rates being paid on existing bonds are worth more when current bonds are being issued at lower rates. As an example, an existing bond with a 2% interest payment will be worth more prior to its maturity than a newly-issued bond with a 1.5% interest rate and a similar maturity and credit rating.  That higher value is expressed in a rising price for the bond, because the actual interest payment does not change. The extent of the price increase is often a function of the bond’s maturity; the longer the bond remains outstanding and pays more interest than the new bonds, the larger the price increase will be.

The impact of lower rates on stock prices is less direct, given the many factors that affect stocks.  If rates are being lowered by the Fed because the economy is perceived as going into a slowdown/ recession, then stock prices may go down even as interest rates decline. The New York Times article cited above (10/31/19, Page A1) mentioned that GDP in the US increased by 1.9% in the third quarter, a slowdown from recent previous periods, and added that inflation remains under 2%.  An economic slowdown could have as one effect lower profits for businesses, and ultimately it is the profits/earnings of companies that determine stock prices (the price/earnings, or P/E, ratio we have discussed in many prior Comments).

That said, lower interest rates can instead help to move stock prices higher, as investors come to believe that stocks are the primary place to earn a decent return on their money.  When interest rates go down and bond prices rise, the overall return from bond investments can become quite low, as the interest payments as a percentage of the investments declines.  Therefore, investors looking for a satisfactory return on their money are pushed into the higher-risk/higher-returning asset class of stocks, or higher yielding, so-called “junk bonds” which have more credit risk. This can create a dangerous situation for people whose goals are best met by conservative investments with modest price changes, rather than by investing more in the asset classes with much higher volatility , namely the stock and junk bond markets. (As a warning, look no further than the observation from Larry Swedroe at the top of page 3, which we quote every month). It is also worth noting that when rates begin to rise again, and investors receive higher interest payments, they will also most likely be looking at declining bond prices, the pace and extent of which depends on a variety of factors.  This is the ongoing dilemma of investing in bonds.

We continue to help our clients navigate these various impacts, which are unknowable in advance of their occurrence, and develop asset allocations appropriate to their particular financial situations. We also suggest revisions as situations change over time, or when one asset class becomes over weighted compared to others (i.e., rebalancing).

Impeachment and the Financial Markets

Sam Ngooi Comments

The financial media continues to assign reasons for current stock and bond price movements, up and down, including: (a) the extent of economic slowdown in the US and internationally; (b) progress, or lack thereof, in the ongoing trade war with China and other countries; and (c) the Federal Reserve’s willingness, or reluctance, to continue lowering interest rates to stimulate economic activity without generating unwanted inflation.

Towards the end of September, a new factor entered the narrative, as the likelihood of impeaching President Trump seemed to be on the rise.  Whether that event would help or hurt financial asset prices became a question. There were up and down days during this period, which would seem to make causation quite difficult to assign. That said, and with the understanding there are many different views on this topic, we will discuss an article by Neil Irwin on this subject (NYT, 9/26/19, page B3).

The article begins by noting that during the two-year period starting with the 1972 Watergate break-in  and ending with President Nixon’s resignation in 1974, the S&P 500 fell 25%. During the Clinton impeachment in 1998, by contrast, the S&P 500 gained 22%. The article takes the position that “in the 1970s markets were not responding to troubles and high drama in Washington; they were adjusting to oil embargoes and a spike in inflation. In 1998, the markets reflected a booming economy…. These historical episodes of impeachment drama show that any moves driven by political headlines tend to be modest and short-lived. Economic fundamentals matter a lot more. So don’t be surprised by an occasional day in which activity in Washington appears to move markets…. But do be surprised if these effects turn out to be more than temporary blips.”

The article continues by citing a report from economists at Cornerstone Macro, concluding that:  “Although there were days when market moves were outsized, in both historical examples, markets simply continued a trend that was already in place and attributable to other factors…. So the existing market trend – reflecting a global economic slowdown particularly concentrated in manufacturing – is likely to persist, unaffected by the president’s latest troubles.”

Mr. Irwin adds a caveat: “The question for a potential Trump impeachment seems less about the instant reaction to the latest developments, and more about whether there could be a feedback  loop between impeachment and economic policy.” He cites the ups and downs of  trade policy as a major factor in today’s markets, “much as the oil embargo in 1973 and the dotcom boom in 1998, and that trade is an area over which President Trump has direct control.” He also notes that impeachment will likely make any legislative deal-making highly unlikely, and questions whether it is more or less likely to drive Trump to resolve some of the current trade conflicts. He concludes: “All of which means that to assess the eventual market implications of a Trump impeachment, it’s not really a matter of economic analysis.  It may ultimately be about behavioral analysis.”

In our view, impeachment is a “wild card,” adding uncertainty to an already uncertain political and financial environment. We tend to agree with the Irwin article’s basic point that impeachment may not be a major factor in how markets react over the long term, but also retain our general skepticism about predictions of any kind. Instead, as usual, we advocate developing asset allocations appropriate to your financial situation, and revising them only as your situation changes over time.

Early Lessons About Money

Sam Ngooi Comments

Usually in our Monthly Comments, we share our observations about the financial markets. But this month, we’d like to shift the focus, onto some thoughts about how we live with money. We start with a question:

How did you learn your early lessons about money? 

Was it from your family? Or maybe from your friends? Were you in a classroom, or possibly the corner store? How old were you? Does a single incident stand out? Or maybe a few smaller moments? Is now the first time in a long time you’re recalling them? Who else knows about these early lessons?

Money is a fascinating, complicated subject. From the time we’re little kids, money shapes us: where we live and what we do, our life experiences and aspirations. We all have unique personal histories and priorities when it comes to money. Even partners and siblings – maybe especially partners and siblings – can have dramatically different approaches to financial life.

At the same time, it’s a frequently taboo topic. Important as it is, a lot of our “money life” happens in silence and isolation, conversations that don’t happen, memories that linger but stay buried. This taboo isn’t just imagined. In her 1922 book, Etiquette in Society, in Business, in Politics and at Home, the American manners expert Emily Post wrote, the “very well-bred … intensely dislikes the mention of money, and never speaks of it (out of business hours) if he can avoid it.” Unfortunately, this taboo can have toxic repercussions.

There’s a concept in the field of education, known as “the hidden curriculum,” which refers to all the things we learn, even though they’re not explicitly taught. On reflection, it’s easy to start to see how powerful the hidden curriculum of money is, and how perverse and misaligned our cultural expectations often are around the topic. Consider: Money drives so much of our decision-making … but we’re not supposed to talk about it! No wonder money routinely tops the list of the most stressful topics in peoples’ lives.

Most of us don’t learn the fundamentals of money or personal finance when we’re young. There’s no formal, widespread curriculum. So we get our lessons in fits and starts, through what we see and hear – as well as from what we don’t see and fail to hear. As a result, money can often feel like a Gordian knot, an unsolvable puzzle.

The complexity is frequently compounded by the financial industry and press. “Financial speak” can seem like a whole other language. The people who explain money for a living typically stand to gain when the rest of us are befuddled. They’re the “experts”, and just as we do to other experts – electricians, pilots, engineers – we cede the field to them.

But money is too important, too central, and too learnable to wave the white flag on. That’s why, for Park Piedmont, we focus a lot of our time trying to inform and educate. To limit, wherever possible, the financial jargon. To share with you what we know – and freely admit when, as is so often the case, something is unknowable (like where the markets are headed). And to help you, our clients, feel increasingly competent and confident in your own life with money.

We see those roles as a big part of our work, and an important part of our purpose as a firm: to help make financial decision-making less complex, more understandable, and more of an ongoing, open conversation.

To keep the conversation going … please feel free to share your formative money moments with us, and/or your thoughts on other aspects of the “hidden curriculum” of money. We’d be happy to hear them!

August 2019 Financial Market Volatility Update

Sam Ngooi Comments

In our most recent July 2019 Monthly Comments, we discussed the media coverage of early August stock price volatility on days when prices were lower. Key market movers were presented as 1) the direction of interest rates; 2) tariff and currency disputes with China; and 3) the inverted yield curve for ten-year and three-month US treasuries, perhaps signaling an economic recession. One additional point on the relationship between stock prices and recession not frequently discussed in the media is that stock prices do not necessarily fall in response to recession (a lengthy subject for a future Monthly Comments).

Those same July Comments pointed out the surprising upturn in stock prices since Trump’s election. The updated figure as of Friday, August 16 (using the S&P index close of 2,888) was 35%, 4% lower than end of July. That same index is still up 15% for 2019 year-to-date.

Another key point in those July Comments was to focus on percentage changes and not just absolute numbers (e.g., an 800-point drop in the Dow Industrials translates to a 3% decline). Any percentage decline is further modified by your specific portfolio allocation away from stocks, and into the less volatile, lower returning asset classes of bonds and cash equivalents.

As for bonds, they continue their recent trend of yield inversion, with the ten-year Treasury yielding 1.56% and three-month Treasury yielding 1.87% (as of the August 16 close), an unusual situation the length of which is pure guesswork.

The additional thought we would like to add in this update is to suggest that the media ‘s efforts to assign reasons for and economic significance to this recent volatility may be misplaced. Rather, this volatility may just be the effect of short-term trading among financial market participants looking for short-term gains.  This thought may be supported by the fact that there are up days for stock prices sprinkled among the down days, which might not occur if the price movements were truly economically significant. We and others have expressed this idea during other periods of volatility, but it remains one we should keep in mind as we all follow the news.

July 2019 Comments: Early August Volatility for Stock & Bond Prices

Sam Ngooi Comments

After relatively modest price changes during July in both stock and bond markets, early August witnessed a return of substantial stock and bond price volatility.

  • Although the recent declines (and gains) appear large in absolute numbers, the important figures are the percentage gains and declines. A drop of 500 points on the Dow, for example, sounds huge, but at current price levels it’s a more modest 2% decline. And depending on your specific allocation to stocks, these declines are moderated even further.
  • Markets currently seem to be responding to the daily news, focusing on the Fed’s position on US interest rates and the China trade dispute, involving both tariffs and more recently currency exchange rates. These factors have a direct bearing on the growth outlook for the US economy.
  • News that does not appear to be driving daily market price swings, for now at least, are the problems surrounding the Trump presidency and various international conflicts. These issues tend to have a more indirect bearing on the outlook for the US economy.
  • History has demonstrated that stock returns are determined by the underlying corporate earnings that support the price level of stocks (the Price/Earnings, P/E, ratio), an analysis that plays out over time and is impacted by many factors. To the extent the daily news items are likely to impact earnings, then there may be some connection of the news to market prices. But because the mix of factors and their significance are changing all the time, it is extremely difficult to make judgments on a day-to-day basis as to the appropriate level of stock prices. (As you know, we do not try to predict future stock price movements or their causation.
  • A few reference points for stock prices (S&P 500 index) may be useful:
    • At the time of Trump’s election in early November 2016, the index was 2,140.
    • At the end of 2018 (a year when the S&P 500 declined 6.2%), the index was 2,507, or a gain of 17.1% from Trump’s election.
    • At the end of July 2019, the index was 2,980, a gain of 39.2% from Trump’s election. With all the current day-to-day news that appears to be negative, stock prices have somehow continued to move considerably higher.
  • As for bond prices, they continue to move higher, as the benchmark ten-year US treasury yield has declined to around 1.7% in early August from its October 2018 high of 3.15%, a very substantial move. The Fed reduced the short-term rates it controls by 0.25% at the end of July 2019, but the ten-year yield has declined much more than short-term rates have (the inverted yield curve discussed last month), apparently anticipating a slower economy going forward and further rate reductions by the Fed. With a relatively modest 2.1% gain for Q2 2019, the most recent GDP report did show that “the American economy is slowing…but there are few signs that the decade-long expansion is on the brink of stalling out” (NYT, 7/26/2019, page A1).
  • When yields fall and bond prices rise, this is a mixed blessing for bond investors, since the yield is the income they receive from the bonds. At some point this cycle will reverse, with declining prices and rising income. The timing of this eventuality is very much an unknown.

What to do with this information? As our clients know, we advocate the long-term, stay-the-course approach, since timing markets is extremely difficult, if not impossible, and the allocations we recommend to clients have already taken into account the potential for declines in stock prices.

June 2019 Comments: Impact of Economic Recession on Stock & Bond Prices

Sam Ngooi Comments

During June, stock and bond prices in the US increased. Some of the likely reasons for these increases seemed to be contradictory, but all centered on the likelihood that an economic recession may be on the horizon. A recession refers to an economy that has two consecutive quarters of negative gross domestic product (GDP) growth.

In the current economic and market environment, the bond market is signaling an expectation of a recession with ten-year US Treasury yields falling below the short-term (3-month) yield. This is called an inverted yield curve, since most of the time longer maturity bonds come with higher yields to offset the price risk of holding longer maturity bonds when rates rise. As interest rates on the ten-year Treasury have fallen since last October, the prices of these bonds have increased, adding to the investment return of bonds. This good news is tempered by the fact that interest received from these bonds has declined. The other consequence of lower rates is that at some point in time these rates will go back up, and prices will decline even as interest received increases.

The bond market is also expecting some reduction in interest rates from the Federal Reserve, after nine quarter-point increases over the past few years.  These reductions are supposed to have the impact of stimulating economic growth, assuming a recession is coming.  The Fed has taken the position that it will watch the progress of the economy to see if and when an interest rate decrease is warranted.

Other government action that can stimulate the economy would be to increase government spending and/or lower taxes. While these actions can have the negative effects of adding even more to the budget deficit and increasing inflation, they will likely be used if needed in an election year featuring President Trump running in part on his economic record.

But if a slowdown in the economy is good for bond prices, it would seem to be a negative for stock prices, because an economic slowdown presumably means more unemployment, less business activity, and falling profits, which are the main determinant of future stock prices. The current Price Earnings ratio (P/E) for the S&P 500, using twelve-month trailing reported earnings, is 22 (source: S&P 500 pe ratio). Note that the 22 P/E is considerably higher than the long-term average P/E of 15, but this has been the case for several years now. If future earnings (the “E” in P/E) are likely to decline, stock prices would appear vulnerable. But we also know that many factors affect stock prices, and it’s possible that easing trade conflicts, a compliant Fed, and a supportive federal government can avoid and/or minimize a recession and thereby keep stock prices from declining.

None of this information comes as a surprise to the investment community, so it is up to investors to decide whether to stay the course and see whether a recession does occur, and if so how significant the decline in economic growth proves to be. The alternative is to try and time the market impact from a potential recession, by selling ahead of it and then buying back in when it ends.  As our clients know, we advocate the long term, stay-the-course approach, since timing markets is extremely difficult, if not impossible, and client allocations have already taken into account the potential for declines in stock prices.

March 2019 Comments: Inverted Bond Yield Curve

Sam Ngooi Comments

As has been discussed in many previous Comments, interest rates (also called yields) are typically higher on longer maturity bonds, to compensate for the greater price risk associated with having to wait longer to get the initial principal back, called “maturity.” At maturity, investors can buy new bonds at then-current interest rates.

When yields on longer bonds fall below those of shorter-term bonds, the investment community labels that an “inverted yield curve”, since the normal yield curve, with higher longer-term rates, has a positive slope. This is highly unusual, but happened during the last week in March. The following chart shows the normal slope of a positive yield curve (from March 2018), and the inversion of that slope with the current (2019) slightly negative spread between ten-year and three-month Treasuries.

A recent New York Times article (NYT, 3/22/19, page B4) discussed this situation and its potential implications as follows: “[i]nvestors normally demand higher yields to buy longer-term bonds, and when those long-term yields decline it can signal a slowdown in economic growth. On rare occasions, long-term yields can actually fall below yields on short-term bonds, a ‘yield curve inversion’ in the parlance of the markets. Such unusual occurrences have preceded every recession over the last 60 years.”

The article continues by discussing the views of Duke Professor Campbell Harvey, whose research in the mid-1980s first showed the predictive power of the yield curve. “[Professor Harvey] stressed that an inversion must last, on average, three months before it can credibly be said to be sending a clear signal. If that does occur, history shows that the economy will fall into a recession over the next nine to 18 months. But even with the yield curve’s track record for predicting recessions, Professor Harvey emphasized that there was no such thing as certainty in economic forecasting. He is quoted as follows: ‘A model is just a model, it is not an oracle. It helps us the forecast future, but it might at any point fail.’”

To these observations we would add the following points:

  1. Even if a recession is on the horizon, it does not necessarily mean stock prices will decline from current levels.
  2. As a corollary, it is always possible that the chance of a recession is already priced into the current level of stock prices.

February 2019 Comments: Spending Income or Spending Total Return

Sam Ngooi Comments

Most clients, when starting to use their investment portfolios for part or all of their spending, have as an objective to spend the income but not the principal. We would like to take this opportunity to discuss this objective and why it is so difficult to achieve in a low-interest rate environment.

First, some definitions:

  • Income is interest on bonds/bond funds and dividends on stocks/stock funds.
  • Total return is income plus or minus the changes in the value of your portfolio. During periods when stock and/or bond prices are higher, total return will likely exceed income. During periods when stock and/or bond prices are lower, total return will likely be less than income. Note also, stock and bond price changes sometimes move in the same direction in the same time frame but sometimes do not, and that stock price fluctuations are far greater than bond price changes.
  • Required Minimum Distributions (RMDs) from retirement accounts are not simply income, even though they are taxed as ordinary income. They are a combination of income and principal based on the composition of the portfolio.
  • Higher-yielding bond-like investments carry more price fluctuation risk than basic bonds, which is why they pay more interest.
  • Annuity payouts are part income and part return of principal, not all income (a subject all its own).

Next come some necessary facts to relate to the issue of income and total return:

  • Over the last 19 years (early 2000 to year-end 2018), the stock market (as measured by S&P 500 price change only), has gained a surprisingly low 2.6% annualized (S&P 500 index change from 1527 to 2507). If, however, you measure the price gain from the 2009 low (677), the annualized gain is an unusually high 14%. The ten years from 2000 to 2009 were basically flat, with two multi-year periods of very large price declines (2000 to 2002, and October 2007 to March 2009). Assume also that dividends added approximately 2% annually to stock returns over the entire 19-year period.
  • As for bond prices, they also fluctuate, but much less than stock prices. Bond price changes are mostly in response to changes in market interest rates. When rates decline, prices rise, but the interest received is lower. Conversely, when rates rise, prices decline, but interest received also rises. From the years 2000 to 2009, rates declined and prices rose, and the annualized total return approximated 6% (a far better return than stocks in the same ten-year period), with at least half the return coming from interest rates and the other half from rising prices. But at some point, the rate declines stop, and that is essentially what has happened from 2010 through 2018 (with a few years of modest exceptions). Although rates have recently increased slightly, investors have been left collecting relatively little interest income (approximately 2.0% to 2.5% annually on the Vanguard Intermediate taxable bond fund), and are no longer seeing the rise in bond prices.

Putting all this information together, you can see that, over the last 19 years, annualized price gains/declines have been quite erratic, and income much more stable. No matter what your allocation to stocks and bonds, for every $1 million in total portfolio value, the annual income was likely to be no more than 2.5%, or $25,000. If the spending need from your portfolio was more than $25,000 per $1 million of capital, some of your withdrawal must have come from the principal value of the portfolio, which is fine as long as portfolios are gaining in value more than the withdrawals. Problems arise when markets and portfolio values decline, and spending is coming from income plus the declining value of the principal. The recent history (since 2000) of market price changes has indicated that there are gains to be expected, especially after periods of decline. But the periods of decline can be quite scary to people living off their investment portfolios.

We often see investors trying to earn more income from their portfolios, but there is always some tradeoff with the risk being incurred. We think it makes more sense to acknowledge that principal will likely be spent, unless your principal value is large enough to generate the spending need all from income. (For example; a $3 million portfolio could reasonably be expected to currently generate $75,000 of annual income at 2.5%. If $75,000 is the annual withdrawal needed, then the income may be sufficient).

PPA can run illustrations to show how long your funds are likely to last, spending both income and principal, based on assumed investment returns and inflation-adjusted spending amounts. Please let us know if we can be of assistance on this very important matter.

January 2019 Comments: Observations on Stock & Bond Markets

Sam Ngooi Comments

Once again, for some time perspective, we are using the chart below from our Special Comments to set out a few price points for the S&P 500 index since Donald Trump’s 2016 election (point and percentage increases calculated from November 9, 2016).  Other charts providing long-term context appear on pages 6-9.

Day After Election, November 2016, Base Level: 2,163;
Year End 2017: 2,674; +511; +23.6%
Summer 2018 Highs 2,930; +767;  +35.5%
November 23, 2018 Lows; 2,632; +469;  +21.7%
Nov 30-Dec 1, 2018 Recent Highs; 2,790;   +627 +29.0%  +29,0% +29.0++%29.0%
December 24, 2018 Recent Lows;        2,351; +188;    +6.7%
Year End 2018,        2,507; +344;   +15.9%
January 31, 2019        2,704; +541;  +25.0%

A few comments from these figures:

  • The December 24th low was 19.8% below the September (“Summer” in the chart above) 2018 all-time high, just less than the 20% that constitutes a “bear” market;
  • The recovery from the December 24th low to the end of January has been substantial, approximately 16%;
  • As for the somewhat longer view, the index is back to 25% higher for the two plus years since the election, well below the level reached in September, but not so far from the November 30th – December 1st

When stock prices stage such a rapid “U-turn” recovery, the normal instinct is to look for underlying reasons. For January, the financial media has focused on favorable corporate earnings, the Federal Reserve’s comments about holding off on raising interest rates, and progress on trade negotiations with China. Ignored in the explanations for this rally appear to be the US government shutdown and the ongoing negative issues surrounding the president, as well as the drumbeat of expert commentary that a recession is coming, somewhere in the world.  Note that corporate earnings reports are continuing, so the Price/Earnings (PE) ratio of the S&P 500 is in flux right now. The PE ratio gives us an idea of how reasonable stock valuations are in a particular time frame.

At Park Piedmont, we do not try to divine the reasons for short-term price movements, either up or down. Whether the events that created the 2018 September to December bear market for stocks have somehow dissipated to the point of providing solid ground for the January rally, or whether stocks are simply gyrating in a broad range to accommodate those who trade the short-term price movements of stocks, we simply do not know. We believe only the unknowable future will provide answers. Of course, this simply leads us to repeat our normal advice: try to ignore the short-term price fluctuations, develop and maintain an appropriate asset allocation for your particular needs, and hope that the historically favorable long-term results of the financial markets work in your favor.

Turning to bonds, returns were positive again in January, as interest rates on the ten-year US Treasury declined for a third consecutive month, this time to 2.63%. Comments from various Federal Reserve officials that their program of raising interest rates every three months would likely be put on hold for a while seemed to be a catalyst for driving interest rates lower and bond prices higher. It is worth noting that the full year 2018 saw four quarter-point rate increases (100 bps) from the Fed on the ultrashort rates it controls. By contrast, the ten-year US Treasury yield, set by buyers and sellers of bonds in the marketplace, increased only from 2.41% to 2.69%, an increase of 28 bps. When the ten-year rate gets close to the short-term rate, some market observers believe that is a signal for an economic slowdown.

The opposite view is that stronger economic growth is likely to continue, and with it the threat of rising inflation, which the Fed tries to limit with its interest rate policies. The debate about future rates of growth will surely continue, but for now, the allocation to bonds in investor portfolios continues to provide positive returns.