While October, so far, has seen markets retreat from their 2018 highs, the 3rd quarter was underpinned by good data. We feel the recent weakness in stock prices is reflective of short-term pressures and not a breakdown of corporate profits or economic fundamentals. As quoted in our last quarterly newsletter,
‘Our work suggests the equity markets are gathering enough energy, and momentum, to permit a dash to new all-time highs and then keep right on pushing higher.’
U.S. markets did push higher, gaining nearly 7% for the 3rd quarter. International stocks were also positive, but to a much lesser degree.
We made a small shift in assets away from international back to the U.S. this most recent quarter based upon current U.S. economic momentum. We do, however, remain committed to international exposure as longer-term fundamentals, such as valuation and currency, point to future strength in these markets.
In fact, every investment research firm we follow – from GoldmanSachs to JP Morgan, Black Rock, Morningstar, Bank of New York Mellon, etc. – predicts significantly stronger returns for international than the U.S. over the coming decade.
On the bond front… more anemia as expected. Rising interest rates will keep bonds in this same mode for a few more years, but look for higher bond returns come 2021. In the meantime, our approach of supplementing bonds with buffered note positions is working extremely well. Look for us to continue with this strategy.
So why the optimistic bent?
Well, consumer confidence is at its highest level in eighteen years, while unemployment is at its lowest level in nearly two decades. As we’ve written before, ‘a confident and employed consumer is a spending consumer.’ The good news extends to businesses as well, with small business optimism reaching its highest level on record back to 1973.
Additionally, the manufacturing index climbed to its highest level since May 2004. Confident businesses also tend to spend. And as owners of stocks, we will benefit from the spending patterns of both. While there will certainly be ‘bumps in the road’ ahead, there is good reason to be optimistic long-term.
In his book Unleashing the Second American Century: Four Forces for Economic Dominance, Joel Kurtzman describes “Four Forces” that will continue to propel markets higher: soaring levels of creativity, massive new energy reserves, gigantic amounts of capital, and unrivaled manufacturing depth. Each of these transformative themes is outlined below:
Soaring levels of creativity
No other country in the world, in such a short time, has created so many scientific, technological, industrial, commercial, financial, and artistic innovations. Not only has America’s creativity changed science and business, it has changed world culture.
According to Kurtzman, “Creativity is important. If it wasn’t, no one would marvel at Apple, or be impressed with innovations from Pfizer, IBM, Tesla, or Boeing. No one would listen to our rock ‘n’ roll, rap, and country and western songs; watch our movies and TV shows; or come to America to study or work. I doubt creativity is in our genes, but creativity is in our culture. Let me explain a little more about the forces I am referring to by taking a visit to ‘innovation corridor’.”
Massive new energy reserves
America is now a net energy-exporting nation. These new sources of energy can be used as fuels or turned into products. Imagine a future in which oil and natural gas wealth flows in greater measure to our shores and not to the Middle East, Russia, or Venezuela.
Gigantic amounts of capital
As a result of the Great Recession, business has renegotiated its debt, and businesses and individuals have become ultraconservative with capital. Trillions of dollars of investment funds are in private hands, waiting for the go-ahead to be deployed.
Kurtzman writes, “When you have access to capital, the result can be magical. The Milken Institute studies show that when capital is plentiful, and prudently lent, and borrowers can obtain it in transparent ways and under good terms, economies grow.”
Unrivaled manufacturing depth- America makes a myriad of things, and now it will make more as businesses move to the United States to take advantage of abundant energy and capital and to tap into our vast reserves of intelligence and creativity.
According to Kurtzman, “Americans produce about 20% of all the stuff in the world. Given that we are just 4.5% of the world’s population, and China is 19%, that’s quite an achievement. America’s productivity, measured on a per capita basis, remains the world standard. America works smart and our factories are top-tier, second to none.”
As we have written multiple times in the last handful of years, we are in the midst of a ‘secular’ bull market. Secular bull markets may have periods, perhaps even years, when they pause or pull-back, but the trend is strongly up over time. The average secular bull market lasts roughly eighteen years.
We are now in year nine of this bull market. So stay optimistic and stay invested, even when pull-backs challenge your resolve. There is much to be optimistic about.
As always, please do not hesitate to call or email if you have questions regarding this information or your portfolio in specific.
—On Behalf of the Investment Committee