Quarterly Commentary

The Cornerstone Investment Commentary: 3rd Quarter 2019

Last quarter’s commentary claimed that “it’s been quite some time since the Federal Reserve’s (Fed’s) monetary policy held such sway over the near-term performance of stock and bond markets.”   Two rate cuts helped U.S. large-cap stock (S&P 500) and bond markets reach new highs and offset heightened U.S. – China trade tensions, weakened manufacturing data and rising instability in the global economy.

Stock market gains have been almost nil since last September as corporate profits struggle to keep rising.  And it’s no wonder, with the headwinds of trade uncertainty, slowing economic growth and rising interest rates (before falling of late).  The better question is why stocks haven’t declined.  The simple reason is U.S. consumer spending continues to grow steadily while inflation has remains dormant.  Whichever of these trends exerts the stronger pull on future profits will determine how global markets perform near term.

In this environment, we expect large-cap stocks to continue outperforming small-caps due to trade uncertainty burdens and for U.S. markets to still be the most attractive given our more resilient economy relative to elsewhere in the world.  If interest rates fall further and consumer spending holds firm, U.S. large-cap stocks could keep rising in the absence of attractive alternatives.  Likewise, real estate securities (REITs) should perform well.  For commodities, until global economic growth increases, they could well remain in the red.  Your portfolio now holds one-tenth fewer equities than a few years ago and has been positioned for such an overall situation since this past Spring.

For bonds, it’s been a different story.  They notched another strong quarter and have outperformed stocks in the last year.  This mattered greatly last Fall when bonds gained 3% while U.S. stocks lost over 20%.  In environments like the present, U.S. Government and high-grade corporate bonds most often deliver these diversification benefits.  As the New York Times will report 11OCT, bonds are often misunderstood as only being valuable for the interest they pay.  This is no doubt important; however, it’s their ability to rise at precisely the times stocks and commodities are falling which are sometimes their most important attribute.

In light of all this, we will allow your U.S. large-cap stock and intermediate-term U.S. Government bond holdings to continue rising for now, rather than ‘sell’ their profits to invest in less-attractive areas.  We will also resist the ‘market timing’ frenzy that always accompanies times that seem uncertain and volatile.  Your overall financial plan does not require such speculation in order to succeed (though making big bets and being wrong is the most assured way to tempt your financial fate.). Of course, should these uncertainties clarify themselves, we will not hesitate to respond and re-position your portfolio in a prudent manner.

For now, we welcome any thoughts and/or questions and send you warm upcoming holiday wishes from our entire Cornerstone family.  Thank you for the continuing opportunity to work with you.

Past Commentary