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Investment Letter

4th Quarter 2019

2010-2019 will be known as the “Decade of the Bull” for investors. While the record books will associate this period with prosperity and the longest bull market in history, the 2010 start was an uncertain time filled with financial anxiety and stress. Damage from the financial crisis and market downturn persisted in the global landscape, and economic conditions seemed bleak, confidence was low, and investors sought financial safety by sitting on the sidelines. Fortunately, investors didn’t have to wait long for conditions to improve. The economy began a course of slow and steady growth fueled by accommodative monetary and fiscal policy, improved labor markets, and low inflation. As of December 31, 2019, the current bull market has survived 129 months, and the price of the S&P 500 Index has increased approximately +378%.  To the delight of investors, the decade long success story forges ahead.   
 
The rising momentum in the financial markets benefited the performance of most asset classes. Fourth quarter returns were mostly positive and solidified a stronger finish to the year. For 2019, the Dow Jones Industrial Average posted a total return of 25.34%; the S&P 500 Index led the way with a 31.49% total return; and the MSCI EAFE Index (international stocks) delivered a 22.01% total return. See the attached table for quarter and year-to-date performance results.
 
Data continued to support the domestic economic expansion throughout 2019. Growth was slow but consistent; unemployment remained at low levels; inflation hovered around 2.0%; housing activity improved; and strong consumer spending persisted. Manufacturing activity, business investment, and increased energy prices pointed to weakness, but these issues were mainly related to global trade tensions.   
 
To promote the current expansion, the Federal Reserve’s strategy shifted in 2019 to an accommodative approach by lowering the federal funds rate three times in the second half of the year. The December meeting of the Federal Open Market Committee (FOMC) confirmed the continuation of the expansion and another adjustment in the FOMC’s strategy.  In consideration of monetary policy, the Committee decided to maintain the current level of the federal funds rate in order to assess the full effects of its 2019 policy decisions. They anticipate the current stance will remain appropriate over the short-term (depending on data), and they believe it will support economic activity, strong labor market conditions, and low inflation
 
The end of 2019 brought improved prospects for international conditions. First, an agreement on the Brexit fiasco was finally reached and the U.K. is scheduled to leave the European Union on January 31, 2020. A transition period ending in December 2020 will follow during which the two sides will negotiate a future relationship on issues such as trade, immigration, customs procedures, regulations, law enforcement, security, data sharing, and a host of other issues.  A successful conclusion to Brexit would finally provide some certainty and clarity for all parties involved. Additionally, a trade deal with China was reached that should alleviate some of the global tensions. According to the details of the “Phase One” agreement, the U.S. will reduce planned tariffs on Chinese goods, and China will boost purchases of U.S. goods while addressing disputes on intellectual property and practices. The deal would be the first step toward a more balanced relationship but getting both sides to live up to the accord will be an accomplishment. Political posturing could delay or force modifications at the expense of economic prosperity.
 
Our 2020 outlook for the domestic economy is still optimistic, and we believe an abundance of evidence exists to support the continuation of the current market expansion. Therefore, we expect more of the same from the domestic economy…low and slow growth supported by strong consumer fundamentals. The Fed should maintain their current stance (no movement) on rates during 2020 unless economic conditions deteriorate. The impeachment situation is producing some intense political noise. The case is still evolving, but we are hopeful the outcome will conclude with minimal economic effects.  The Presidential election later this year will add some uncertainty to the mix.  Again, we are hopeful the political influence will be nominal.  Given the current economic and financial conditions, we recommend investors temper their portfolio return expectations for 2020.   A repeat performance from last year would be welcome, but it is not a result we anticipate.
 
The international outlook for 2020 is improving thanks to central bank accommodative monetary policy, the U.S. trade deal with China, and the progress on Brexit.  We expect further stabilization in global economies as trade tensions ease, and an eventual return to normal levels of activity in global manufacturing. Challenges still exist, but the macroeconomic winds are trending in a favorable direction, and we believe overall conditions are stronger as the new decade starts.
 
Managing risk 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. While we prefer our positive outlook, we recognize significant threats that can alter outcomes for 2020 and the new decade. Here are some potential game changing scenarios. A setback in trade relations and Brexit negotiations; changes to monetary policy based on rising inflation; lower earnings and rising costs for corporations; political instability; legislation and regulation reform; extreme weather events; cyberattacks, terrorism, and the geopolitical wildcard. We are keeping a watchful eye on threats as they develop.
 
Successful investing requires a plan, and one of the most important parts of a successful plan is a properly diversified investment portfolio. The potential to improve portfolio returns occurs during the diversification process because the investor selects an investment strategy based on goals, time horizon, and tolerance for volatility. The key to diversification is investing in asset classes that do not historically move in the same direction each year (cash, bonds, and stocks). The table on the following page represents the annual returns of various asset classes and of a diversified portfolio.[1] The diversified portfolio in the example uses offensive assets (stocks), as well as, defensive assets (cash and bonds) to smooth out the volatile swings of individual asset classes.
 
 
A performance comparison illustrates two points (for any given year).
1.     A diversified portfolio is unlikely to ever lead the group in performance.
2.     A diversified portfolio is unlikely to ever be the worst performer. 
 
Simply put, a diversified asset allocation strategy is a great method to manage portfolio risk while endeavoring to maximize portfolio returns. 
 
Asset Class Annual Returns
2000 through 2019
 

Date

Three-Month U.S. T-Bill Index

U.S. Intermediate Treasury Bond Index

S&P 500 Index

Russell 2000 Index

MSCI EAFE Index

(net div.)

Dow Jones US Select REIT Index

Diversified Portfolio

 
 
 

2019

2.28%

5.22%

31.49%

25.52%

22.01%

23.10%

18.06%

 

2018

1.87%

1.41%

-4.38%

-11.01%

-13.79%

-4.22%

-3.26%

 

2017

0.86%

1.14%

21.83%

14.65%

25.03%

3.76%

11.00%

 

2016

0.33%

1.06%

11.96%

21.31%

1.00%

6.68%

6.79%

 

2015

0.05%

1.18%

1.38%

-4.41%

-0.81%

4.48%

0.95%

 

2014

0.04%

2.57%

13.69%

4.89%

-4.90%

32.00%

7.89%

 

2013

0.07%

-1.34%

32.39%

38.82%

22.78%

1.22%

14.81%

 

2012

0.11%

1.71%

16.00%

16.35%

17.32%

17.12%

10.45%

 

2011

0.10%

6.57%

2.11%

-4.18%

-12.14%

9.37%

2.53%

 

2010

0.13%

5.29%

15.06%

26.86%

7.75%

28.07%

12.74%

 

2009

0.21%

-1.41%

26.46%

27.17%

31.78%

28.46%

17.42%

 

2008

2.06%

11.35%

-37.00%

-33.79%

-43.38%

-39.20%

-20.52%

 

2007

5.00%

8.83%

5.49%

-1.56%

11.17%

-17.56%

3.95%

 

2006

4.85%

3.51%

15.80%

18.37%

26.34%

35.97%

14.17%

 

2005

3.07%

1.56%

4.91%

4.55%

13.54%

13.82%

5.52%

 

2004

1.33%

2.02%

10.88%

18.32%

20.25%

33.16%

11.09%

 

2003

1.16%

2.10%

28.69%

47.25%

38.59%

36.18%

21.05%

 

2002

1.80%

9.29%

-22.10%

-20.48%

-15.94%

3.58%

-6.99%

 

2001

4.44%

8.16%

-11.89%

2.49%

-21.44%

12.35%

-0.93%

 

2000

6.19%

10.25%

-9.10%

-3.03%

-14.17%

31.04%

1.89%

 
 
 
 
Diversification plays a significant role in any investment strategy, but investing is also an ongoing process that requires regular attention and maintenance for a successful outcome. 
 
Three critical steps for managing an investment portfolio. 
1.   Monitor – Investments should be evaluated for changes in strategy, performance, and risk.  Some investments are not designed to be an all-weather performer.
2.     Rebalance – The asset allocation of an investment portfolio should be reviewed and adjusted as needed to match the appropriate risk level. Deposits, withdrawals and account growth can cause a portfolio’s asset allocation to become unbalanced.
3.     Revisit – Review the plan to make sure it is still appropriate based on goals and objectives. If the plan no longer makes sense, a new strategy should be adapted.  
 
 
 
As I have often stated, our investment philosophy remains based on the fundamentals. 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.
 
Your financial health is important to us, so consider making a New Year’s resolution to revisit and update your financial plan. It is also a good time to review your estate planning documents for an update if you had any personal circumstance changes.
 
Common events that could necessitate estate plan alterations:
·        Birth or adoption of a child or grandchild
·        Death of a spouse or family member
·        Marriage, divorce, or re-marriage
·        Illness or disability
·        Child or grandchild reaching the age of majority
·        Education funding
·        Death of a guardian, executor, trustee
·        Retirement
·        Sale of a home or business interest
·        Large gift or inheritance
·        Revisions in federal or state income tax or estate tax laws
 
As our firm enters its 37th year of providing advisory services, we want to wish you and your family a happy, healthy, and prosperous New Year. If you would like to schedule an appointment, wish to receive William Howard & Co.’s SEC Registration Form ADV Part 2A and Part 2B Narrative Brochure, or if you have any questions, please contact our office.  
 
In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust. 
 
With kindest personal regards, I am
 
Very truly yours,
 
WILLIAM HOWARD & CO. FINANCIAL ADVISORS, INC.
 
                       
 
2019 Total Return Index Performance
Asset Class
Index
4thQtr.
YTD
Cash
BofA/ML Three-Month U.S. Treasury
0.46%
2.28%
U.S. Bonds
Barclays Intermediate-Term Treasury
0.01%
5.22%
U.S. Large Co. Stocks
S&P 500
9.07%
31.49%
U.S. Small Co. Stocks
Russell 2000
9.94%
25.52%
International Stocks
MSCI EAFE (net div.)
8.17%
22.01%
Real Estate
DJ Select Real Estate Securities Total Return
-1.23%
23.10%
Source: Morningstar
 
 

    U.S. Economic Data

 

GDP

2.1% Growth (annual rate) – 3rdQuarter 2019

 
 

Inflation

2.3% CPI (less food and energy) and 2.0% CPI (all items) over last 12-months ending November.

 
 

Interest rates

One rate decrease during the 4thQuarter 2019 (October). Federal Funds Rate range = 1.50 – 1.75%

 
 

Jobs

December 2019 data - Unemployment at 3.5%; 145,000 non-farm payroll jobs added; Labor force participation rate 63.2%; Notable gains occurred in retail trade and health care.

 
 

Manufacturing

Manufacturing activity contracted in December; the overall economy grew for the 128thconsecutive month; December ISM Manufacturing Index registered at 47.2%, a decrease of 0.9% from the November reading; Sentiment improved compared to the 3rdQuarter but December marked 5thmonth of contraction for the index.

 
 

Business Spending

Private non-residential investment slowed but remained at an elevated level; New durable goods orders decreased 2.1% in November (downward trend two last three months).

 
 

Corporate Profits

3rdQuarter 2019 - U.S. corporate profits decreased by 0.2%. S&P 500 Earnings per share = $39.81

 
 

Housing

November 2019 year-over year data - New home sales up 16.9%; Existing home sales increased 2.7% %; Median sales price of existing homes rose 5.4% ($271,300); Housing starts expanded 13.6%; Building permits increased 11.1%; Housing inventory decreased 5.7% from last year; MBA fixed 30-yr mortgage rates = 3.91% ending 01/03/2020

 
 

Consumer Spending

Disposable income remained strong; Consumer Confidence Index declined in December (improved conditions but soft short-term expectations); Retail and food services sales increased slightly from previous month; Total vehicle sales rebounded; Personal durable and nondurable spending trended higher; Savings rate = 7.9%.

 
 

Energy

Oil price (West Texas Intermediate) = $61.14/bbl – 12/31/2019; Gas price (U.S. average regular unleaded) = $2.571/gal – 12/31/2019

 
 
 
 

[1]Data provided by Dimensional Fund Advisors. Diversified portfolio composition: Cash 10%, U.S. Bonds 30%, U.S. Large Co. Stocks 30%, U.S. Small Co. Stocks 10%, International Stocks 10%, and Real Estate Securities 10%. Rebalanced quarterly.

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