Second Quarter Newsletter
Responsible Guidance: Second Quarter 2019 Newsletter, July 2019
Summer Travel Plans
In the northern hemisphere when the earth's rotational axis is most inclined towards the sun the official beginning of summer occurs for us and is known as the summer solstice. According to The Old Farmer's Almanac, this officially happened on June 21st. We're not sure if this shift in the earth has any specific impacts on our desire to travel, but certainly the urge to travel and take vacations during the summer increases. An article published by AAA Public Relations manager Julie Hall suggests that approximately 68 million Americans (representing 68% of all travelers for the year) plan on taking a summer vacation in 2019. Stacey Barber, executive director of AAA Travel Information & Content, is quoted in the article saying: “This is quickly shaping up to be another busy year for family travelers, both on the roadways, as well as other popular travel destinations and attractions. To make the most of their vacations, AAA recommends families plan and research as far ahead as possible to avoid missing out on popular activities and fun.”
So, what does traveling have in common with wealth management? Maybe more than you think. We thought we would have some fun drawing analogies from the top travel tips listed in the AAA Newsroom online publication mentioned above:
Do your research
AAA Travel Tip – To make the most of your trip, map out your route in advance, using a tool like AAA’s TripTik Travel Planner. For extra guidance, seek the advice of a knowledgeable travel agent. And be sure to download the AAA Mobile app to find AAA Diamond Rated hotels and restaurants, gas prices and fun stops along the way.
Wealth Management Analogy - Research how different advisors work. Do you know the difference between advisors who work on commission and dual-registered advisors (who can charge both commissions and fees) and fee-only advisors? Does the advisor work as a fiduciary to you? At Baron we work as a fee-only advisor who is also a fiduciary to you. Our only compensation comes from our clients, eliminating outside influences. We sign a fiduciary oath for each client stating we place our client's interests ahead of our own.
AAA Travel Tip– For passengers, pack books, games, or music for the ride, and a pillow. Bring information on your destination to keep kids and other passengers entertained. Pack healthy snacks for kids, especially if you can’t stop for a full meal while traveling.
Wealth Management Analogy - Gather all of your financial information for review including items such as account statements, insurance policies and estate planning documents. Work with your advisor to understand your investment experience and expectations. Outline your specific financial goals and objectives to determine a plan that includes a risk-appropriate investment strategy and how your resources invested in that strategy will help achieve the stated goals and objectives. An effective plan will be one that you can stick with in all economic environments.
AAA Travel Tip – Drivers should plan frequent stops, about every 100 miles or two hours, to remain alert. Make sure everyone is restrained by seat belts or a child safety seat to prevent injury in case of a sudden stop, swerve or crash. AAA members who are renting a car can request a complimentary infant car seat or toddler booster seat.
Wealth Management Analogy - Once you are invested in a risk-appropriate strategy that helps meet your financial goals and objectives, regularly stop to review the performance of your investments. Verify the quality of investments by comparing performance to benchmarks and peer investments. Make changes as needed. Rebalance the portfolio when the weighting of investments is outside of a stated range outlined in your Investment Policy Statement.
Pack your patience
AAA Travel Tip – Be prepared for busy roads and long airport security lines throughout the summer. If hitting the road during a holiday weekend, consider leaving earlier or later than the typical holiday travel times to avoid heavy traffic. Same goes for air travel, and be sure to arrive at the airport at least two hours before scheduled take-off.
Wealth Management Analogy - Keep emotions intact and avoid behavioral mistakes. Unfortunately, markets do not go straight up. Many people are too overconfident when markets are positive and too pessimistic when markets are experiencing negative performance. Don’t lose your patience. Have a plan ahead of time, so that when downside volatility occurs you know what actions to take. A risk-appropriate strategy should keep you invested during volatile times and rebalance when needed. Note that if you use your investment assets to meet lifestyle needs, a cash cushion should be part of your investment strategy.
Be road-trip ready
AAA Travel Tip – Take your vehicle to a trusted repair facility to perform any needed maintenance before heading out on a road trip. In case of an emergency, always carry a flashlight, extra batteries, warning devices such as flares or reflective triangles, jumper cables, a first-aid kit and extra water. To locate a AAA Approved Auto Repair shop in your area, visit aaa.com/AutoRepair
Wealth Management Analogy - Regularly meet with your advisor to review your financial plan progress and provide updates as needed. If something is not going as planned or you can see trouble down the road, it’s better to know your options as soon as possible. At Baron, we call this a "feedback loop" and feel it is an extremely important part of working towards achieving the success projected in your plan.
If the analogies listed sound interesting and important and if you want to learn more…ask us.
A Global Perspective
A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries.
There are popular benchmark indexes that provide perspectives about performance of global investments. For equities, we monitor the MSCI ACWI All Cap Index. This index is designed to represent equity investments across 23 developed and 24 emerging markets. In the second quarter, the index was up 3.35% bringing year-to-date (YTD) performance up to 16.03%. For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies and was up 3.57% in the second quarter and 5.38% YTD.
Though economists and investors would be hard pressed to find significant downside economic signals, most are wondering if conditions outside the U.S. will impact our local economy. Also, the impact from tariffs remains unclear. Nevertheless, the U.S. is entering its 11th year of economic expansion.
The Bureau of Economic Analysis (BEA) announced in its third estimate for the first quarter of 2019 that real gross domestic product (GDP) increased 3.1%. This was in line with the second estimate received in May. This was a move higher from the 2.2% reading for the fourth quarter of 2018.
GDP is a measurement of what has already happened. There are, however, statistical measures that give insight into the future. One of those measures is The Conference Board Leading Economic Index® (LEI) for the U.S. The index is an analytical tool that helps signal peaks and troughs in the business cycle. The May LEI, released on June 20th, was unchanged at 111.8 (2016 = 100), compared to a 0.1% increase in April and a 0.2% increase in March.
“The US LEI was unchanged in May, following three consecutive increases,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “Positive contributions from financial conditions and consumers’ outlook offset the weakness in stock prices and the manufacturing sector. The yield spread’s contribution to the LEI was neither positive nor negative. While the economic expansion is now entering its eleventh year, the longest in US history, the LEI clearly points to a moderation in growth towards 2 percent by year end.”
Note that the quote above references weaker stock prices. The quote reflects performance in May, which was weak. June stock prices were higher, but that was not reflected in the data when the quote was made.
We first shared the chart below in our fourth-quarter letter and believe it is important to continue to track. The blue line represents the LEI, dating back to the year 2000. Since then, we have had two official recessions, which are identified by the shaded gray area. A recession is typically defined as two consecutive quarters of negative economic growth. Using the last two recessions as a gauge, we believe that the chart suggests that there was significant erosion in the LEI (blue line moved lower) prior to the economy realizing negative growth. Though this is only one tool, we would conclude that economic signals, such as the LEI, suggest that opportunities for economic growth remain and that a recession in the near-term is unlikely.
The full release from the Conference Board can be found at:
According to the Bureau of Labor Statistics (BLS), the U.S. added 224,000 jobs for the month of June and the unemployment rate held steady at 3.7%. Notable gains were in professional and business services, in health care and in transportation and warehousing. Job growth averaged 171,000 per month for the previous three months.
The Conference Board Consumer Confidence Index® decreased in June to 121.5 (1985 = 100) from 131.3 in May.
“After two consecutive months of improvement, Consumer Confidence declined in June to its lowest level since September 2017 (Index, 120.6),” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The decrease in the Present Situation Index was driven by a less favorable assessment of business and labor market conditions. Consumers’ expectations regarding the short-term outlook also retreated. The escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence. Although the Index remains at a high level, continued uncertainty could result in further volatility in the Index and, at some point, could even begin to diminish consumers’ confidence in the expansion.”
The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 4.30% in the second quarter, and 18.54% YTD. Corporate profitability, domestic economic data and the Federal Reserve’s dovish tone (accepting or promoting lower interest rates) helped stocks continue on a positive track. Lower interest rates are typically considered an incentive for economic growth, which tends to be good for stocks.
International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 3.68% in the second quarter and 14.03% YTD. Non-developed, or emerging countries (such as China, India, Brazil or Russia) measured by the MSCI EM index, was up slightly, producing a positive 0.61% for the second quarter and 10.58% YTD.
Since the end of 2017, we have heard that international-equity investments appear cheap, on a relative basis, to U.S.-based investments. Though still underperforming the U.S., international equities were able to generate positive returns even though economic growth outside the U.S. remains a concern. We think the relative valuations had a big part in performance. Looking forward, there are some discussions occurring that suggest growth may be turning around outside the U.S. If achieved, you would expect to see international-equity investments outperform on a relative basis.
U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, produced a positive 3.08% return in the second quarter driving YTD performance up 6.11%.
The 10-year U.S. Treasury bond yield was 2.00% at the end of the second quarter, which is lower in yield than where it began the year at 2.69%.
With the Federal Reserve (Fed) indicating a potential rate cut, investors took that as an opportunity to invest in bonds, driving prices higher and yields lower. Speculation about why the longer-term rates moved lower, ranged from acceptance of a lower interest-rate environment to buying U.S. debt that looks attractive, relative to yields offered outside the U.S., to concerns over future economic growth.
Though the Fed paused/stopped raising short-term interest rates and investors bought longer-dated bonds, interest rates for different maturities are acting very differently. Short-term rates have been going up with the previous Fed-rate increases while longer-term rates have remained within a tighter range. If you plot interest rates versus the time-to-maturity to earn those rates, you have created what we call a yield curve. In previous newsletters we have written, in great detail, about the changing shape of the yield curve and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods). Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government Bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep (long-term rates higher than short-term rates) and wide spread, indicates possible future economic expansion and fixed-income investors are compensated for taking longer-term risk. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.
We should be specific in noting that we have been using the 2-year and 10-year rates as the main data points. At the end of the second quarter, most U.S. bonds/bills rates with maturities of 1-year or less were greater than the 2-year rate. So, you may have heard serious discussions about an inverted yield curve. We will stick with our data points for our discussion but recognize that there may be some news/ research outside of this newsletter that sounds different. Currently, the shape of the yield curve is fairly flat, on a relative basis, meaning long-term rates are slightly higher than short-term rates. As noted, the 10-year bond finished at 2.00%, while the 2-year ended the first quarter at 1.75%, a difference of 25 basis points (a basis point represents 1/100 of 1%). This suggests the bond market is uncertain about the future of the economy. The changing shape of the yield curve has really been occurring since at least 2014, when the spread between the 2-year and 10-year was over 220 basis points (bp). We will continue to watch the shape of the yield curve as one of the many signals of a changing economy.
Housing and Real Estate
Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index continues to be the strongest YTD performing asset class that we monitor, producing a positive 19.27% return. For the second quarter, the index was up 1.79%.
Knowing local markets is best for understanding values of residential housing.
According to Freddie Mac (FM), the average 30-year residential home mortgage rate moved even lower to 3.75% near the end of the second quarter. The rate was higher at 4.51% (close to a seven-year high) when we shared our fourth quarter newsletter. The lower rates may have a positive impact on the housing market. For those who have a current mortgage and have not refinanced in some time, it may be worth looking at potential options.
The Bloomberg Commodity Index (BCOM) declined in the second quarter, losing 1.19% and dropping YTD performance to 5.06%. Tame inflation data has been tied to the less than stellar performance of this asset class.
Natural Resources serve as an expected hedge against inflation and offers statistical benefits to portfolios. We continue to monitor all of our asset classes to determine the importance and relevance for our strategies for clients.
Baron Client Strategies
Whether you are planning to travel or planning for retirement, determining an appropriate strategy ahead of time will provide guidance for a path to success and for actions to take when things might not go as smoothly as expected.
Do your research – Work with a fiduciary who puts your interest first.
Be prepared – Have a comprehensive plan that is based on your profile.
Safety first – Monitor investments and rebalance when needed.
Pack your patience – Keep emotions intact and avoid behavioral mistakes.
Be road-trip ready – Review progress and update your plan as necessary.
You can see how nicely these analogies fit to our basic tenets of investing: Create a globally-diversified and risk-appropriate strategy. Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and have regular feedback loops to update information.
Your Service Plan
One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course as necessary. For more specifics, check out our “What You Can Expect” document by clicking the button below.
Your Personal Economysm
You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives. We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.” So, we have decided to add this new section as a reminder of all of our services and to share ways in which we have helped clients outside of investing.
Pension options: Does your employer offer a pension for when you retire? We have helped many clients determine the choice for their pension option. The decision does involve both analytics and “art”, since a major factor in deciding what’s best is unknown - how long you will live. Each situation is different, and we have been involved in recommendations to choose the lump sum, to choose the single life annuity and layer in an insurance option and to choose an option that pays some or all spousal benefits. If you have to make a decision on a pension, reach out to us to help determine what choice might be best for you.
Having an appropriate plan and sticking to the plan are considered important factors for achieving financial success.
One important and exciting new addition to our website is the online client-portal tab, which will allow you access to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides.
Would you like to enroll in paperless Baron statements? Paperless statements will be accessible through our online client portal in the “Documents” section. You must be enrolled in the client portal in order to view your paperless statements. You will receive an email notification each quarter your statements are posted. Paperless statements are expected to begin for statement cycles after August 1, 2019. Contact Baron at 1-866-333-6659 or at firstname.lastname@example.org to enroll.
We would like to thank all of you who attended our Casino Night in New Jersey in May. It is always nice to get to spend time with you in a social setting. We hope you enjoyed the evening as much as we did!
Look for an email invitation soon to our next event, an educational “Wine & Wealth” to be held on September 12th. Our discussion will include “Choosing a Medicare Plan” presented by Medicare Consultant Mary Jeanne Cullen. Buffet dinner will be included. Please reply to email@example.com by September 5th. Seating will be limited to the first 60 who respond.
For more educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.
We are proud of our philanthropic efforts, which include pro-bono work, as well as monetary donations to The Fair Lawn Food Pantry, the All Faiths Food Bank in Sarasota, the Adopt-A-Soldier Platoon, Spectrum for Living (serving adults with developmental disabilities) and the SCARC Foundation Capital Campaign (serving people with developmental disabilities). In addition, we are proud to continue our nine-year tradition of providing a Baron Financial Group Scholarship to two deserving Fair Lawn High School graduates (1 female and 1 male), who plan to further their business education. We are proud to help!
Baron Financial Group, LLC
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 11th, 2019, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.