Quarterly Commentary – July 2018

What can be said about this year other than it has been a whirlwind of events, economic and political. Of course, these two are so intertwined that at times one can hardly make a distinction. Tariffs, GDP, employment, inflation, immigration, deficits, health care, environmental issues, Supreme Court nomination and on and on. Each day/week seems to bring a different area of focus and yes in many cases unrest.  So how is an investor to deal with this dizzying array of issues and how have the financial markets fared? Let us look at the numbers. Through June 30, 2018, here is where the major indices stood:

  • Standard & Poors 500 Index (Large Cap US stocks):   +2.65%
  • Barclays Aggregate Bond Index (all bonds):   1.66%
  • Dow Jones Industrial Average (30 leading Large Cap US stocks):   1.81%
  • MSCI ACWI Ex US (Large Cap Foreign stocks):   -3.79%
  • NASDAQ 100 (Primarily large technology stocks):   +10.40


From the above you can see that most areas of the financial markets were slightly up/down with a major exception being the NASDAQ 100 which is weighted heavily to the large cap technology sector, i.e., Facebook, Amazon, Apple, Microsoft and Google. Even with the seemingly endless stream of turmoil, these companies continue to rise in price. If fact so far this year (as of July 10, 2018 and according to CNBC) stocks of Amazon, Netflix and Microsoft are responsible for 78% of the NASDAQ 100 return for this year. However, one of the most common questions asked of us is “Where is a safe place to put my money?” Safety of course is a relative term but here is our take on that.

We like to use a basic example of driving. I want to get from point A to point B and what is the fastest/safest way to get there? Of course, the safest may not always be the fastest. Driving conservatively and hugging the right lane may be the safest but, in most cases, the slightly more aggressive driver tends to get to the destination the fastest. A very aggressive driver (read speeding) usually arrives the fastest but every now and then, they are slowed because either a State Patrolmen pulls them over for speeding thereby delaying their trip or there is an accident in that fast lane that slows everyone done. Most of us tend to be middle lane drivers and are willing to arrive a bit later as opposed to running the risk of a ticket or accident. Investing has many of those same characteristics.

Holding bonds in your portfolio is “safe” and tends to temper the potential volatility of the stock market. Not all bonds by any means but staying with high credit ratings and short to medium duration lets a person sleep a bit easier. However, at times these bonds will slow you down and temper returns. That is exactly what has occurred so far this year. Interest rates have risen and by definition, bond prices will fall. (There is a mathematical reason for that which can be discussed later in detail.) So those bond holdings have acted as a drag on returns and that is illustrated by the Barclay’s Aggregate Bond Index noted above that is down -1.66% from the first of this year to June 30. These bonds are still paying interest as promised it is just normal volatility in that side of the financial markets. This trend may continue throughout this year if interest rates continue to rise as forecast. Does this mean we dump all the bonds? No. Just like in the driving example, we stay in the lane in which we feel comfortable and allow those few speeders to pass us by realizing we will all get to the end point but without the extra level of risk associated with that fast lane.

Past performance does not indicate future results. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties.  Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Advisory Services, LLC. as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The S&P 500 is comprised of 500 stocks representing major U.S. industrial sectors and is considered representative of the market as a whole. Performance figures are inclusive of dividends reinvested. Investors cannot invest directly in an index. Standard & Poor’s Index data can be found at http://www.standardandpoors.com/home/en/us.  The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy. The Nasdaq Stock Market is an American stock exchange. It is the second-largest exchange in the world by market capitalization, behind only the New York Stock Exchange located in the same city. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The MSCI ACWI ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries*. With 2,154 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.