“And the sun took a step back, the leaves lulled themselves to sleep and autumn was awakened.” – Raquel Franco

The S&P 500 Index just finished its most prolific first nine months of a year (+20.6%) since 1997. This is on the heels of a near bear market loss of -19.9% in the fourth quarter of 2018. The net impact is a flat return in U.S. equities over the last twelve months. Uncertainty with a trade war, Brexit, impeachment proceedings, and a slowing economy has driven volatility and limited growth in global equities.

Uncertainty

There is always some uncertainty influencing the markets and the markets do not react favorably to uncertainty.  Here is a closer look at the uncertainty which has influenced the volatility in the markets over the last year:

• Trade War with China: On June 15, 2018, President Trump declared that the United States would impose a 25% tariff on $50 billion of Chinese exports – the beginning of the current trade war with China. Since that time, the U.S. stock markets have paused with limited growth waiting for a finalized agreement. This has produced stress on the entire world economy. The WTO (World Trade Organization) recently downgraded its forecast for global trade growth this year from 2.6% to 1.2%, and for next year, from 3% to 2.7%.

• Slowing Economy: The United States economy expanded a healthy 3.1% annualized rate in the first quarter of 2019. The economy grew by just 2% in the second quarter and appears to be treading water.  Even with a slowing economy, there are still some very strong data supporting the economy – low unemployment and consumer spending continue to be strong. If there is resolution to this uncertainty, the economy has the ability to recover quickly.  If the issues causing uncertainty drag on, the economy could be pulled into a recession.

• Brexit: The United Kingdom is one of the top ten largest economies in the world. The U.K. is battling a toxic combination of a struggling economy and unprecedented political uncertainty with no outline to find a solution.

The items highlighted above along with a pending impeachment and new conflict in the Middle East has fueled a volatile and uninspiring market.

Positives

As mentioned previously, the economy is still producing positive growth which could turn into significant growth if the pending issues are resolved in a reasonable amount of time.  While this article has focused on the lack of returns in equities, there is a reason to have a strategically diversified portfolio.  Real estate, bonds, and market neutral funds have all produced above average returns.

Take Control

Investing is very much like life from the perspective that you must focus on the things you can control. Volatility in the market and the economy are similar to death and taxes – you can’t avoid them. As an investment advisor, I am often asked if the market is headed up or down or how next year’s election might impact the economy. I express my opinions, but I am always brought back to my financial planning roots. In a sense, none of this really matters. Either a Democrat or Republican wins the election. If there is resolution with the trade war with China, another problem will arise somewhere else in the world. In short, there is always something in the world impacting the markets.
What you can do is worry about what you can control:

• How much are you saving and investing?
• Is your allocation appropriate and balanced?
• Have you chosen low cost quality investments?
• How are you tracking against your financial plans or goals?

As you navigate through this economy, try to keep a long-term prospective and focus on what you can control.  This will lead to a healthier tolerance for the markets while mitigating risks.  With this in mind, client portfolios have been brought close to allocation targets.  If there is a resolution to the issues outlined, we will take advantage of an increasing market.  If the economy is pulled into a recession, portfolios are strategically planned according to risk tolerance and goals.