Dana R. Consler, BridgeTower Media Newswires
“May you live in interesting times” is an English expression purported to be a translation of a traditional Chinese curse (Source: Wikipedia). It certainly reflects what we have been through in the U.S. investment markets thus far this year.
The stock market is up over 18% in 2019 through June 30 so far. In the bond market the benchmark 10-year U. S. Treasury yield has dropped from 2.69% to 2.01% this year through June 30. That results in a return of 7.44% (Source: Bloomberg). Bond yields and prices move in opposite directions.
2019 so far has been robust for investors. Stocks have been “climbing a wall of worries,” both on the economic and political fronts. Bonds have been likewise helping to boost returns of personal portfolios, pension and 401(k) plans.
Are risks elevated at mid-year? Yes. Stocks almost hit their all-time highs last Friday and with interest rates so low now, bond market risk has risen as well.
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Our economic outlook
The economy is slowing to projected GDP growth in 2019 of about 2.0% to 2.5%, down from 3.0% last year and 2.5% in 2017.
A recession is unlikely in 2019 due to our solid economy, the lowest unemployment rate in 50 years and strong consumer confidence (Source: The Conference Board). Consumer spending makes up 68% of our economy (Source: Bureau of Economic Analysis).
Corporate earnings will be lower this year to, perhaps a 6% growth rate, from the strong levels of 2018 due to the drop in the corporate tax rate from 35% to 21%.
The P/E ratio of the S&P 500 is now 17.0% (Source: Bloomberg, as of July 1, 2019) versus the long term average of about 15.5; stock valuations are elevated, but not overly so.
Trade disputes may be the biggest wildcard in how the economy and stocks perform this year. Markets hate this uncertainty and volatility, up and down, reflects that.
Historically, the third year of the presidential election cycle (2019) is the strongest for the stock market, (Source: Investopedia) suggesting stock prices could grind higher despite the risks.
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What to do now
Consider these strategies, subject to your financial circumstances, objectives and risk tolerance. Implementation of any financial strategy should only be made after consultation with your investment professionals and tax advisor:
• Underweight your normal target weight for stocks by a good 10% and add alternative strategies to further reduce market risk. Alternatives help you “play defense” when we are at the top of this long term bull market.
• Consider having a healthy allocation to international equities, to benefit from the diversification they provide. International equity P/E ratios are lower than for U.S. stocks and their yields are now higher.
• For your bond investments, shorten your portfolio duration to reduce your exposure to the possibility of rising rates. Again, “play defense” by taking risk off the table. Lower duration means you are assuming less risk if rates rise.
• In both stocks and bonds, stay very diversified across different securities, sectors and styles. This is critically important because one strategy — growth-vs.-value stocks, for example — never outperforms all the time.
• It is too early to get too overly bearish on stocks, however, because the condition that tends to accompany bear markets, a recession, will not likely happen in 2019. So don’t be tempted to bail out of either the stock or bond markets without careful consideration.
• Trying to time the markets won’t work, so don’t try.
• Stay invested but reduce risk to below where you are normally.
While the economy looks to be solid and is still growing, investment risks are lurking and likely to be higher in the second half of 2019. Being prepared for more volatility and the next bear market is a prudent strategy, for serious investors and Boy Scouts alike.
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Dana Consler is executive vice president of Karpus Investment Management, a local fee-based, SEC-registered investment advisor managing over $3.3 billion of assets for individuals, corporations, retirement plans, IRAs, non-profits, unions and trustees as of May 31. 2019. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585-586-4680). He has been a regular contributor to The Daily Record for over 20 years.
