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Investment Letter

3rd Quarter 2019

The global economy and financial markets experienced an autumnal transition during the 3rd Quarter of 2019 as elevated uncertainties cooled investor confidence.  Despite the instabilities, the domestic economic expansion survived another quarter to extend its 10+ year streak.

The low and slow trajectory for U.S. economic growth was confirmed by the recent GDP increase of 2% (annual rate).  Support for the expansion continued in many areas highlighted by the following: 50-year low in unemployment, subdued inflation, housing activity improvement, and strong consumer spending.  However, unresolved trade tensions and political/geopolitical turbulence contributed to a contraction of manufacturing activity, a decline in Treasury Yields (inverted yield curve), and increased recession fears.  Weak conditions abounded in the international landscape.  Europe’s struggles continued; the Brexit fiasco remained undecided; and economic data from emerging markets and China disappointed.  

2019’s solid investment performance was diminished during the quarter.  Specifically, domestic small cap stocks and international stocks experienced a small decline while bond returns were relatively flat.  Domestic large cap stocks (S&P 500) set 8 new record highs during the first month of the quarter before falling 6% in August.  The roller coaster ride ended for large cap stocks with a positive 1.7% return for the quarter.  Real Estate has been the steady performer (so far) in 2019 with a third quarter return of 6.83% and a year-to-date performance of 24.64%.  As investors and avid football fans know, it takes four complete quarters to decide a victory.  Hopefully, performance in the last quarter of 2019 will be a good one for investors. 

After three years of rate hikes, the Federal Reserve changed directions by cutting rates (25-basis points) at the July and September meetings. The decision to adopt a more accommodative monetary policy stance was based on information of pronounced downside risks.  Federal Open Market Committee (FOMC) members stated that appropriate monetary policy actions taken now should result in economic support over the coming quarters due to the lag effect between policy actions and economic activity.  The September meeting minutes observed three dissenting votes by FOMC members.  Two votes for no action were based on the concern that additional easing could exacerbate financial imbalances, and one vote was for a larger rate reduction as added insurance against a slower economy.  

Regarding future policy actions, the Committee reiterated policy movement was not on a preset course, and they will continue to monitor economic developments and respond accordingly as circumstances dictate. 

Brexit news did not improve.  The countdown to the October 31st deadline is closing in with no agreement in place and an extension for additional negotiations seems unlikely.  European Union officials insist they are willing to work to secure an agreement, but the UK refuses to budge over their proposal to exclude Northern Ireland from the EU customs union.  Deal, No-Deal or Delay…time will eventually tell.   

As we close out the remainder of 2019, we are still positive about the domestic economic outlook despite the recession fears.  We expect slow and steady growth, reduced interest rate pressures, strong labor market conditions, solid consumer spending, housing activity improvement, and restrained inflation to persist.  We anticipate the Fed will continue to be open-minded about additional interest rate cuts into 2020.  Our wager is on another 25-basis point reduction before year end and possibly another in the first part of next year depending on the data.  We do not expect much improvement on trade relations with China.  Negotiations should continue as both sides haggle for favorable terms, but a comprehensive agreement seems unlikely anytime soon. 

The international economic outlook is not as cheerful.  Slower growth headwinds, the no-deal Brexit scenario, increased geopolitical tensions, and trade uncertainties are discouraging factors for investors.  We are hopeful for resolutions that will turn the tide toward economic prosperity.

Risk management is not easy.  The prudent investor needs to identify, analyze, and prioritize risks that are applicable then develop a strategy to avoid, eliminate or mitigate.  We are keeping a watchful eye on risks and opportunities as they develop. 

Taxpayers and planners are still adjusting to the modifications caused by the Tax Cuts and Jobs Act of 2017.  The list below provides several tax planning strategies to consider as the end of 2019 rapidly approaches. 

  • Take advantage of high Federal Estate and Gift Tax exemptions (expire in 2025).
  • Contribute the maximum amount to retirement plans.
  • Contribute to a 529 Plan or Education Savings Account.
  • Defer or accelerate income and expenses.
  • Gift appreciated property.
  • Maximize the itemized deduction benefit through additional charitable gifts.
  • Manage investment gains and losses.
  • Monitor tax liability estimates and adjust withholding/estimated tax payments to avoid underpayment penalties.
  • Take required minimum distributions (RMDs) by the deadline.
  • Consider a Qualified Charitable Deduction for a scheduled RMD.
  • Consider a Health Savings Account (HSA) if you participate in a high deductible health insurance plan. Allows pre-tax savings to pay for qualified medical expenses. 

Investment Basic Tip - Maintain balance to be prepared for the next downturn. This is a good motto for investors to follow as the economic expansion grows older. To maintain balance, the prudent investor needs to adhere to an all-weather disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.  A diversified asset allocation strategy uses offensive assets (stocks), as well as, defensive assets (cash and bonds) to smooth out the volatile swings of individual asset classes in any given year.

We believe it is time---not timing---that matters most.   Progressing toward long-term financial goals is more important than short-term performance, so stay focused and be calm when the markets are not. 

Please contact me if you have any questions or if you would like to discuss the tax planning strategies. 

With kindest personal regards, I am

Very truly yours, 



2019 Total Return Index Performance

Asset Class





BofA/ML Three-Month U.S. Treasury



U.S. Bonds

Barclays Intermediate-Term Treasury



U.S. Large Co. Stocks

S&P 500



U.S. Small Co. Stocks

Russell 2000



International Stocks

MSCI EAFE (net div.)



Real Estate

DJ Select Real Estate Securities Total Return



Source: Morningstar



    U.S. Economic Data


2.0% Growth (annual rate) – 2nd Quarter 2019


2.4% CPI (less food and energy) and 1.7% CPI (all items) over last 12-months ending August.

Interest rates

Two rate decreases during the 3rdQuarter 2019 (July and September). Federal Funds Rate range = 1.75 – 2.00%


September unemployment at 3.5% (lowest since 12/1969); 136,000 non-farm payroll jobs added in September; Labor force participation rate 63.2%; Notable gains occurred in health care, professional and business services, and government jobs.


Manufacturing activity contracted in September; the overall economy grew for the 125thconsecutive month. The September ISM Manufacturing Index registered at 47.8%, a decrease of 1.3% from the August reading. Decrease in business confidence continued. September second consecutive month of contracting expansion. Overall sentiment for near-term growth is cautious.

Business Spending

Private non-residential investment continued to trend upward (increasing since 2016); New durable goods orders increased 0.2% in August. The third straight monthly increase.

Corporate Profits

2ndQuarter 2019 - U.S. corporate profits increased by 3.8%. S&P 500 Earnings per share = $40.14


August 2019 data - New home sales increased 7.1%; Existing home sales up 1.3%; Median sales price of existing homes rose 4.7% ($278,200); Housing starts expanded 12.3%; Building permits increased 7.7%; Housing inventory decreased 2.6%; MBA fixed 30-yr mortgage rates = 3.99% ending 10/02/2019

Consumer Spending

Disposable income remained strong; Consumer Confidence Index declined in September (consumers less positive about current conditions and short-term outlook); Retail and food services sales increased slightly from previous month; Total vehicle sales fell slightly during the 3rdQuarter; Personal durable and nondurable spending increased; Savings rate = 8.1%.


Oil price (West Texas Intermediate) = $54.09/bbl – 09/30/2019; Gas price (U.S. average regular unleaded) = $2.642/gal – 09/30/2019


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