Monthly Outlook: September 2018
Now that we’ve had our Labor Day holiday, we have to concede that summer is behind us. On Wall Street that always signals a return to seriousness and focus. Trade wars, corporate earnings, upcoming elections, global central bank actions, debt and valuations will all be studied for clues about year-end market movements. But before we look ahead, let’s review the markets to see what’s working and what’s not.
Global stocks are only up 3.6%, year-to-date (YTD) which is a little low for eight months. But that doesn’t tell the whole story. U.S. stocks are up 9.7%, YTD, while international stocks are down 3.4%, YTD. Looking back at decades of history, we see that U.S. and international stocks are actually highly correlated, moving up and down together. So, we have to wonder if U.S. stocks will join the international downtrend? Or will international stocks rejoin the U.S. uptrend? We’re going to find out over the next few months.
Bonds are still down 1.2%, YTD, as the U.S. Federal Reserve (Fed) continues to ratchet up interest rates by ¼% every couple of months. Analysts assume another ¼% hike is coming in September. But again, the headline doesn’t tell the story. Although the Fed has steadily hiked Fed Funds rates from near 0% to 1.9% over the past two years, the market (which controls the rest of the yield curve) seems to have stalled. Currently, the 2-year U.S. Treasury rate is about 2.6% and the 10-year U.S. Treasury rate is holding at about 2.8%. The good news is that this means bonds have returned to an uptrend or “buy” for us. We moved bond portfolios out to about an 8-year average maturity in August.
Technology Stocks are Hot, But…
We are quite aware and you are too, most likely, that technology stocks have been red hot again this year. In 2017, tech stocks rose 34% and in 2018, YTD, they’re up another 19%. Many investors have piled into these stocks and are feeling pretty smug about their gains. And, admittedly, the trend for tech stocks remains “up” for now so it’s right to keep holding in our view. We own a good amount of tech stocks in our clients’ portfolios, too. But it’s worth remembering how the ten sectors rotate in and out of favor. Research shows that the average annual difference between the best and worst performing sector has been 30%. In 2016, Energy returned 28% and Healthcare lost 3%. In 2017, Technology gained 34% and Energy lost 1%. There’s another little fun fact about sectors: it’s very rare for the best sector in one year to be the best sector the next year. Furthermore, it’s terribly difficult to predict which sector will be best/worst in advance. But if Technology was the #1 sector in 2017 and is currently the #2 sector in 2018, how likely do you think it is that it will be #1 in 2019? History suggests not very likely. Perhaps 2019 will be the year of Consumer Staples, Utilities, or maybe Healthcare. But I doubt it will be Technology. The top 5 stocks in the Technology sector have an average price-to-earnings (p/e) of 38x. The average p/e of the broader market (S&P500) is only 23x. So tech stocks are expensive and extended, but still trending higher. Let’s just be mindful, watchful, and willing to sell/trim tech stocks when needed.
Introducing iFolios Direct
Since Ryan Investments was founded in 2001, we’ve been focusing on providing money management to larger portfolios for families, trusts, and non-profits. Our strategy has been to build portfolios using low-cost index funds and to actively manage “the mix” of holdings based on price trends. We’re different because we’re always dually focused on growing the portfolios while protecting from loss. We trademarked our strategy as “iFolios” back in 2013. No change there.
Last month, thanks to new technology at our custodian, Charles Schwab, we can now offer our iFolios strategy to nearly everyone (only $5,000 minimum). We’ll manage our six iFolios models and Schwab technology will follow our models to trade the individual portfolios at Schwab. We’ve named it iFolios Direct and we’re really excited to be able to help more investors manage for growth & protection. You can learn more at our website. If you have friends with smaller portfolios, we’d appreciate it if you’d share the good news.