Final Quarter of 2019 is Here:
With just less than three full months left this year, it’s a great time for a year-end review and start looking towards 2020. Give us a call today to schedule your personal review so we can discuss your current situation, review 2019 to-date, and start planning for next year. Call or email us today so we can reserve a time for your personal review and planning update, either in-person or online this quarter.
Social Security-Be Aware of Scams:
Scams to steal Social Security numbers are on the rise. More than 30,000 people reported Social Security imposter scams to the Federal Trade Commission in 2018, more than all the allegations received in the preceding 14 months. As a result of this crime, consumers lost more than $10 million in 2018.
The latest scam is the suspended Social Security number scam. It starts with a phone call where the caller ID spoofs a number of the Social Security Administration. A professional-sounding voice tells the victim that his or her Social Security number has been suspended due to “suspicious activity.” To un-suspend the number, the scammer says the person must be transferred to a Social Security representative. Once transferred, the victim will be asked for personal information, including the last four digits of their Social Security number and birthdate, even bank account number and home address in order to “verify” their identity. Typically, the scammer will ask for payment in order to un-suspend the number.
Needless to say, Social Security numbers are never “suspended.” The Social Security Administration will never ask for money. We wanted to warn you that these calls are happening and that if you get one, you should hang up no matter how nice or professional or authoritative the person sounds.
While many such scams are obvious and the public has been well warned not to give out personal information to anyone they don’t know or trust, actual dealings with Social Security can create confusion in this regard. Some of you may be overly suspicious, afraid to enter your personal information in order to open a My Social Security Account. The irony here is that if you don’t set up an account, someone else may do it first. Here is a case where entering personal information online is a protective measure that can actually help prevent identity theft.
SSA’s Office of Inspector General offers these tips on scam awareness. Understand the threats. Scammers are actively and increasingly using phone calls, emails, and text messages to get people to send money or part with personal information.
No Commission Trades: This week many of the major online brokerage firms announced they are going to be offering -0- cost trading. Charles Schwab, TDAmeritrade, and E*Trade among them. If you recall in our January newsletter we had already secured -0- transaction fee trading in client accounts with E*Trade Advisor Services effective January 1, 2019.
Trade war and tariff headlines have driven stock price action during much of the year. September and the third quarter were no exception. A shift in the Fed’s stance and a reduction in trade tensions sparked a rally that took the S&P 500 Index to a new high in July (S&P 500 data—St. Louis Federal Reserve). Despite a late July rate cut, an escalation in trade tensions in August created a brief bout of volatility. Yet, the peak-to-trough decline in the S&P 500 Index amounted to just 6.1%.
Economic growth and a Fed that was (and probably still is) in rate-cut mode (the Fed snipped another quarter-point from the fed funds rate in September) cushioned the downside. But a renewal of trade negotiations—more headlines—and a de-escalation of tensions were well-received by investors. When September ended, the S&P 500 wasn’t far from a new high.
Enter the Fourth Quarter:
October has started out on a volatile note, with stocks falling the first two days of the month over concerns of slowing economic growth, only to be followed by some upside over the past two days. While we suspect that trade headlines will continue to influence short-term trading, let’s keep in mind that the uncertainty surrounding Brexit could also influence daily activity. Meanwhile, Europe appears to be on the cusp of a recession. And, if that’s not enough, the speaker of the House launched an impeachment inquiry against the president.
Some of us are old enough to remember President Nixon’s troubles coincided with a nasty bear market. But was there a link between Nixon and the 1973-74 slide, which lopped nearly 50% off the S&P 500? Or did the economic fundamentals weaken the major averages?
Table 1: Then vs Now
|Inflation rose to double-digit levels, peaking at over 12%
|Inflation low and slowing
|Inflation is low
|Interest rates were spiking higher; prime loan rate hit 12%
|Interest rates steady
|Interest rates are low
|OPEC oil embargo roils economy; oil prices rise four-fold
|Oil plentiful; prices stable
|A glut of oil exists today, and prices are well below levels of recent years
|The unemployment rate jumped; the economy fell into a steep recession
|The economy expanding
|The economy is expanding, and the unemployment rate is near a 50-year low
Source: St. Louis Federal Reserve, U.S. State Dept.
Past performance is no guarantee of future performance
Though political uncertainty likely exacerbated the selloff in the 1970’s, high inflation, high interest rates, and a deep recession took a big toll on stocks.
Contrast 1973-74 with the late-1998 impeachment of Bill Clinton. Twenty-five years later, stocks performed well amid much better economic fundamentals. While no two situations are exactly alike, economic conditions today are more reminiscent of the late 1990s than Nixon’s second term.
We can point to uncertainty lurking in the near term but risks never completely abate. If they do, stocks are usually bid up to reflect perfection. It won’t be long before disappointment sets in.
For the foreseeable future, our client portfolios at all risk levels will maintain our over-weighting towards fixed income/bonds for each risk category. We have begun to slowly transition away from long-term fixed instruments and have removed the majority of floating rate security exposure from portfolios. Long duration bonds still remain a focus but will become significantly less so in the coming months. Eventually, portfolios will only have exposure to short and intermediate focused bonds. If interest rates become a concern in the future, we would most likely begin holding ultra-short and cash-like securities at that time. However, it seems more likely for this concern to come sometime in early 2020, rather than in the imminent future.
Many have become increasingly concerned with the prospect of a recession, which we believe to be warranted. However, we continue to maintain the belief that the impending recession could be quite subtle and subdued by the markets already pre-pricing the majority of this risk. Many cyclical and economically sensitive securities have already seen quite a substantial amount of price compression, especially when compared to the broad markets that have been able to reach all-time highs during different points throughout this year. Value stocks have definitely lagged so far this year, but we continue to find companies that seem to be attractively priced for long-term returns.
All stock exposure continues to come from our individual stock and Real Estate Investment Trust (REIT) models, while the general allocations remain focused on fixed income/bonds. For lower risk levels, this could easily be the case for the next two years or so. However, we will look to become more aggressive when markets warrant such a stance. At this time, it does not seem likely to occur soon, even if the markets continue drifting higher as has occurred this year. We continue to believe in appropriately balancing risk for each client, and as previously discussed, conditions warranting caution are long-term oriented signals that began surfacing back in mid-2018. Once we believe the pro-risk light has turned green again, it would be a reason to increase equity exposure once again. In the meantime, we will continue exercising patience and caution for client portfolios.
While we have seen some rocky days this year, major indices have performed well in general, and the S&P 500 and the Dow have yet to shed 10 percent—an official correction. For the long-term investor, it hasn’t been as volatile of a year because interest rates provide little competition for stocks, the consumer has been strong, and the economy is expanding at a modest pace.
All that to say successful long-term investors do not make investment decisions based on an emotional response to daily volatility and are wary of being whipsawed by headlines.
If you have questions, don’t hesitate to call. Be sure to schedule your review this quarter so we can discuss your specific situation. As always, we are honored and humbled that you have given us the opportunity to serve as your financial advisors.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
It is important that you do not use this to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed. All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone. U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals. All opinions are subject to change without notice in response to changing market and/or economic conditions. 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.