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3rd Quarter of 2019 Commentary From Arthur D. Lyons, CIO


3rd Quarter 2019 Market Commentary

The summer months were anything but quiet for the economy. Constant chatter over trade wars, tariffs and the global recession amplified concerns over manufacturing declines in China and Germany. The market reacted poorly to Administration policy comments, and talk of presidential impeachment added uncertainty. As a result, the best-performing June in decades gave way to a volatile August and September.

At the August low point, the S&P 500 index was down 6.2%, gold had risen to over $1,550 an ounce, the ten-year U.S. Treasury note yield declined to 1.43%, and the Swiss Franc appreciated 4% against the dollar. With a backdrop of negative worldwide sentiment, dismal long term overseas growth outlook, and continued positive U.S. growth (both relative and absolute), AAFMAA Wealth Management & Trust LLC (AWM&T) seized the opportunity to make significant, strategic portfolio adjustments in late August.

International equity allocation was reduced by approximately 55%, with funds reinvested in a combination of large-cap U.S. growth and value equities. With the continued dominance of our economy, coupled with structural economic challenges overseas, the long term outlook favors increased investment in U.S. companies.

Additionally, AWM&T reduced small-cap U.S. allocation by 33-45%, depending on risk level. Structural challenges and changes happening in the small-cap arena are firmly entrenched for the foreseeable future. This tips the scale towards increased large-cap investment, considering both risk and return expectations.

The positive effects of this reallocation, although recent, are already appearing both up and down market. There is optimism that these recent adjustments will benefit AWM&T clients.

The beat goes on…

It seems that there is something new or different for market commentators to worry about every week. Topping the list this quarter is the inversion of the yield curve in August. I’ve discussed the yield curve many times over my past five years with AWM&T and continue to reinforce that, while it can be a helpful indicator of the economy's status, it does not hold final say. Case in point: the S&P 500 is only about 3% below its record September high.

How can this be?

The primary reason is the 10-year U.S. Treasury Note yields 1.5%, inflation is 2.2%, and the estimated price-to-earnings ratio for the market in 2019 is only 17x. Under these conditions, the stock market historically experiences its best level of performance. Despite this correlation, there is still a significant amount of negative sentiment among both retail and institutional investors, and this negativity level has historically proven to be a positive indicator for the market.

Recent economic softness in the US economy is not the harbinger of an impending recession. Slow growth is not to be confused with a recession, in which the economy and earnings actually contract and become negative. In addition to low inflation and interest rates, the labor market is strong, and unit labor costs are steady. These key factors indicate a positive economic environment for the next 12 months.

AWM&T remains at the maximum equity allocation level for the foreseeable future, given this positive investment environment. Keep in mind, recessions don’t happen when corporate earnings are increasing.

As I wrote in the previous quarter’s commentary:

The fixed income market is a different story. For a couple of years now, AWM&T has sounded caution when it comes to bond investments. It's true bond investors have recently performed well thanks to rapidly declining interest rates, current low-interest rates mean there is far more risk than reward.

Additionally, the shape of the yield curve – virtually flat now – demonstrates there is no reason to buy 5 to 10 year bonds when 1 to 2 years will receive almost the same yield. AWM&T remains on the short end of the yield curve for the foreseeable future. This will result in both a lower yield and lower total return to clients in the near term, but will provide greater protection to principal in the event interest rates move up.

 Total returns for period ending 9/30/2019

Quarter  YTD
S&P 500 1.70% 20.55%
MSCI ACWI IMI -0.18% 15.87%
Russell 1000 Value 1.36% 17.81%
Russell 2000 -2.41% 14.15%
Barclays Int. G/C Bond Index 1.37% 6.41%



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We assign every AWM&T client a dedicated Relationship Manager (RM)- an experienced professional that can work with you on your investment positioning. While markets are in this range, take the time to meet with your RM and review your risk profile and any life changes that could impact your financial future.