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November 19 2019 Market Update

By on Nov 19 in Economics, Finance, Financial advisors, Market Update, Worth sharing

Managing Your Portfolio Through Uncertainty

October remained a time of mixed economic and market news, which can be confusing even for the most enthusiastic followers of financial news.

For example, the stock market enjoyed broad gains in October despite falling corporate earnings and continued geopolitical tensions. Those gains were supported by relatively conciliatory language between the US and China in the ongoing trade dispute and by the Federal Reserve’s measures to keep money markets running smoothly.[1]

Gross Domestic Product (GDP) growth, a measure of economic output, came in at below 2 percent on an annual basis for the third quarter. We also saw a slowdown in the services sector, which follows several months of weakness in manufacturing. At the same time, job growth came in higher than expected and average wage growth is positive and stable.[2]

In other words, the data are mixed – as they have been for some time.

Market participants consistently try to read these mixed signals and figure out what trends are the most important for the future. As an investor, what are you supposed to do when the talking heads on TV are interpreting the same numbers in different ways?

Here’s what we suggest.

Look at the Long-Term

While recent data have, to a minor degree at least, pointed to a slowdown in economic output, the Fed’s recent rate cuts offered a measure of support for the economy.[3]

A key open question is what will happen with trade – and what the impact of those decisions will be on the local and global economies.[4] Will an ongoing stalemate begin to impact business decision-making and growth opportunities? Will consumer spending and confidence decline?

We don’t know the answers to these questions. However, even if the short-term outlook were completely sunny, we believe investors should look over a broader time horizon.

One thing you’ve probably heard us say before is that markets go up and markets go down. The same holds for the business cycle: we are currently in the longest economic expansion of the post-war era.[5] In our view, it does not make sense to assume that this will continue forever.

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That said, it’s difficult to gauge what a slowdown will look like and when it’s likely to happen. There are just too many variables – and as we saw in 2008, even the best and brightest didn’t see the financial crisis coming.

This doesn’t mean we simply accept the slings and arrows of every market environment: it just means that risk management is a very important part of any investment policy.

Take Advantage of Risk Management

We’ve already seen signs of concern in US manufacturing on the heels of trade uncertainty.[6] Depending on the various policy steps taken by global governments to bolster their economies, there are many different ways the current environment could evolve.

This is obviously a complicated knot to untangle.

Instead of becoming mired in short-run economic news, we recommend that investors with longer-term needs manage their portfolios with longer-term economic, market, and business risks in mind. For comprehensive risk management, it’s important to add your own personal risk factors, too.

Your resulting investment policy will likely be more robust, methodical, and tax efficient as a result.

This is a valuable exercise because no matter how optimistic you are about the economy or the markets, the environment can change – sometimes rapidly. It makes sense to balance your exposure to different types of risk in a disciplined and data-driven way.

Stay Disciplined

For many investors, one of the most difficult aspects of having a formal investment policy is sticking with it. This is especially the case when markets are going strong: when the S&P 500 or other equity index is up significantly, it can be difficult to feel that you’re underperforming.

Of course, that “underperformance” is likely to be the result of diversification, which limits your exposure to a single asset class or sector. The goal of diversifying is to benefit from performance across the investment landscape – and to offer a buffer against falls in individual asset classes.

But for diversification to work like it’s supposed to, investors need to stay disciplined. This means adhering to the long-term plan despite short-term news, regardless of whether it’s positive or negative. While we believe in adapting and evolving investment strategies over time, we do not believe in reacting to day-to-day news.

Again, this can be difficult: we’ve all seen the way talking heads on TV can get carried away in their pursuit of higher ratings. But, for an investment policy to work, it needs to be built and managed in a disciplined way through natural market volatility.

Ask Questions and Ask for Help

Investment management does not need to be overly complicated, but it is something that we believe requires a methodical, data-driven, and prudent process. It also benefits from communication and understanding.

We welcome your questions about the current market environment and the economic context around it. In our experience, investors who understand the “why” behind their investment strategy are more likely to see the value in steps like risk management, big picture strategic thinking, and discipline.

Please reach out as we head into the end of the year and 2020 to schedule your year-end review – and don’t forget, now is also the time to ask your tax preparer for year-end tax projections!

Best wishes for a wonderful Thanksgiving holiday together with friends and family.

JSF Financial

 


Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.

Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.

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The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice.  All opinions are subject to change without notice.  Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security.  Investing involves risk, including possible loss of principal.  Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results.  The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy.  The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 emerging markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.


Sources:
[1] Source: https://www.nasdaq.com/articles/october-2019-review-and-outlook-2019-11-04

[2] Source: https://www.nasdaq.com/articles/october-2019-review-and-outlook-2019-11-04

[3] Source: https://www.nasdaq.com/articles/october-2019-review-and-outlook-2019-11-04

[4] For more on the importance of trade to the question of global growth, please see: https://blogs.imf.org/2019/10/15/the-world-economy-synchronized-slowdown-precarious-outlook/

[5] Source: https://www.cnn.com/2019/10/31/investing/economy-recession-slowdown/index.html

[6] Source: https://www.markiteconomics.com/Public/Home/PressRelease/9da0cc4fff534c799b83ca979f389627

Performance Table Sources:
BBAB https://performance.morningstar.com/Performance/index-c/performance-return.action?t=XIUSA000MC

S&P 500 http://performance.morningstar.com/Performance/index-c/performance-return.action?t=0P00001G7J&region=usa&culture=en-US

MSCI https://www.msci.com/end-of-day-data-search

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