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November Recap and Market Volatility

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Equity markets in the United States rebounded in November as the S&P 500 increased by +2.0%. Recall that October brought the worst month since 2011 and a market decline of nearly -7.0%. The year-to-date market return now stands at 5.1% despite suffering two corrections (a decline of greater than -10%) and an overall increase in volatility compared to 2017.

November had its share of ups and downs as well. The market suffered its third worst Thanksgiving week since 1939 (-3.8%) before experiencing its best week since 2011 (+4.9%) to close out the month. The market was pleased over two positive outcomes that occurred in the last few days of November: Fed Chair Powell’s speech and a trade war cease fire between the US and China (see below for details).

International markets posted mixed results as Developed International (MSCI EAFE) markets declined by -0.1% while Emerging Markets (MSCI EM) increased by +4.1%.

Within Fixed Income markets, bonds produced positive returns as the Barclays US Aggregate Bond Index increased by +0.6%.

We hope everyone had a great Thanksgiving and we would like to wish everyone a happy and healthy holiday season.

 

We’d like to highlight three key events of November 2018:

Trade War Cease Fire

A cease fire in the ongoing trade war between the US and China was reached at the G20 meeting in Argentina on December 1st. (Yes, we realize that the meeting did not occur in November but since the event was highly anticipated and has been partially driving the markets over the last few weeks, we thought we would include the results). Delegations from both countries were led by their respective Presidents: Donald Trump and Xi Jinping.

Both sides called the meeting “highly successful” as they both agreed to hold off on implementing any new tariffs for 90 days in hopes that a broader agreement can be reached. Recall that earlier this year the US and China both implemented tariffs. The United States agreed not to raise their tariff rate from 10% to 25% on $200 billion worth of Chinese goods starting on January 1, 2019. China agreed to purchase more US goods and to increase their market access.

The two countries have 90 days to negotiate a trade deal or the United States will increase its tariff rate (unless the deadline is extended again). While the two sides remain far apart on several issues, investors were pleased that tensions have cooled. The trade war has created a constant news stream for most of the year and it looks like 2019 will be more of the same.

Powell Changes His Tune

At the beginning of October, Fed Chair Jerome Powell helped exacerbate the market selloff with his comments on the neutral interest rate. The neutral rate is the theoretical interest rate that would neither slow down or speed up economic growth. Powell said interest rates are “a long way from neutral” and the Fed may raise rates “past neutral.” Investors interpreted his comments to mean that interest rates might be going up a lot higher than previously anticipated.

On November 28th, Chairman Powell shifted his outlook and stated that interest rates are “just below” the neutral range. The interpretation here was that the Fed might slowdown their pace of rate hikes. Powell also said that there is no preset policy for interest rates and that the Fed will be data dependent. Investors reacted positively to Powell’s comments as the S&P 500 increased by 2.3% on 11/28, the best single-day since March.

The FOMC will likely raise the federal funds rate range by 25bps to 2.25% – 2.50% at their December 19th meeting. The Fed has previously signaled for three rate hikes in 2019. However, this projection could change in the coming months.

Oil Declines

US crude oil prices suffered their largest one-month percentage loss since 2008 as the commodity declined by -23.0%. Oil prices dropped throughout the month on fears over decreased demand, increasing supply, and rising stockpiles. The United States is continuing to produce more oil as output rose to 11.5 million barrels per day in September, an increase of 21% from last year. Global production also received a boost when the United States announced it granted waivers to eight countries to allow them to continue to import Iranian oil. Government data shows also that US stockpiles have increased for ten consecutive weeks.

OPEC and Russia will meet in Vienna on December 6th to discuss their collective oil output. Estimates are that the group may agree to cut production by over 1 million barrels per day.

Market Volatility

Along with our monthly recap we will also address a client question that has been top-of-mind recently. We get our ideas for these topics through our client conversations and interactions. If you have an idea for a question or subject, please reach out to us.

In our October piece on bear markets and recessions we discussed that the stock market has historically gone up over time, but the returns are rarely in a straight line as market volatility is a common occurrence. This month, we will take an in-depth look at these topics.

In 2018, the stock market has experienced two corrections (a decline of greater than -10%) and an overall increase in volatility compared to last year. 2017 was an abnormal year as the market returned +21.8% while the largest intra-year decline was only -3%. One of our main themes of 2018, was that we expected volatility to increase from historically low levels. We want to highlight that the volatility in 2018 is closer to historical averages than it was in 2017.

At Winthrop Wealth Management maintaining a long-term viewpoint is one of the core tenets of our investment philosophy. We believe that most successful investment strategies employ a long-term approach as markets can be extremely volatile in the short-term. The following data from Bloomberg and JP Morgan makes a compelling case for long-term investing.

The stock market has historically gone up over time:
Since 1980, the S&P 500 has generated a total annualized return of +11.6%. To put this return in perspective, $100 invested in 1980 would be worth over $7,000 today.1 The stock market has done incredibly well over the last 39 years, but it is important to remember that the returns were not linear. Annual returns ranged from -37.0% to +35.5%. In fact, there was only one year where the S&P returned between 11% and 12% (2016). Also keep in mind that this time period includes some of the most volatile periods in history, including the 1987 Crash, Tech Bubble, and Global Financial Crisis.

Returns are rarely in a straight line as market volatility is a common occurrence:
Despite overall positive returns since 1980, there were plenty of declines along the way as the average intra-year price decline was -13.8%. This simply means that at some point each year the S&P 500 dropped by an average of -13.8%. The data makes sense as since 1950 the stock market has averaged at least one correction each year. This reinforces our long-term investment philosophy – since we plan for stock market volatility and we incorporate these assumptions into our financial plans, we are less likely to overreact when it happens. The following chart displays the S&P 500’s annual return vs. the largest intra-year decline since 1980.

Conclusion
Equity markets have historically provided excess returns over the risk-free interest rate (3-month US Treasury Bill) over long time periods. The risk-free interest rate is defined as the return of an investment with no risk of financial loss. Since 1960, the excess return of the S&P 500 over the risk-free interest rate has averaged about 6% each year. As investors, volatility is the price we pay for that excess return. We understand that volatility can be stressful. However, the right mindset combined with a detailed financial plan and a thorough investment process can make volatility much more palatable. As always, we encourage our clients to maintain a long-term viewpoint while remaining focused on their overall goals and objectives.

At Winthrop Wealth Management, financial planning works in concert with investment management. The Financial Plan, which helps clients define cash flow needs and future objectives, drives the investment management strategy. The investment management process is designed to provide well-diversified portfolios constructed with a methodology based on prudent risk management, asset allocation, and security selection.

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Andrew Murphy, CFA
Director of Portfolio Management

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Disclosures:

Securities offered through LPL Financial. Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth Management, a Registered Investment Advisor and separate entity from LPL Financial.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P 500 is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

[1.] This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk, including the risk of loss. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.