Economic growth numbers in the US have generally remained positive for much of the year, especially being seen now in the labor market. A small business optimism survey (NFIB) hit its highest mark ever (surpassing a previous high from 1983). A record 26% of firms plan to create new jobs. The problem now is finding qualified applicants to fill those jobs. 55% of firms have few or no qualified applicants to fill positions with 38% saying they have positions they can't fill. For the first time ever, there are actually more job openings than unemployed people (unfortunately the majority of whom are not qualified for the openings). This has finally been putting upward pressure on wages with 32% of companies already reporting higher compensation and 21% planning higher comp. That is then trickling down to where a meaningful number of companies are raising average selling prices, passing those increasing costs on to the consumer. Headline inflation has been up 5 straight months, but still at a 2.68% (headline CPI) and 2.19% (core, which takes out volatile food & energy categories) year over year basis that seems manageable. This will certainly be something that the Fed keeps an eye on. For now, most everyone seems to expect a Fed rate increase this month and again in December. Retail sales growth was slightly less than expected in August, but year over year was up 6.67%, the strongest since Feb. 2012. All University of Michigan consumer sentiment numbers increased as well. There are certainly plenty of things to still keep an eye on that could be negative impacts to the market. One that comes up often is related to our significant government spending and the deficit. Click here for an article that takes a deeper look at that.
How has this all impacted the markets? Well, it has certainly made the US the strongest place to invest again this year after a brief 1 year period of International and Emerging Market outperformance in 2017 (even though the US was also strong in 2017). There has been a big divergence between US and International markets so far this year, with the S&P 500 index of Large US stocks up 9.45% (and small caps up even more) while the All-Country World index is only up 1.93% due to Developed International being down 5.06% and Emerging Markets down almost 11% (all through 9/14 – Main Mgmt. data).
Much of the international uncertainty has come from the tariff talks and their impact on growth and economic output. Europe, especially has been a bit more stagnant in some of their economic activity. China has shown some resilience in their economy, despite the tariff talks and many global managers and strategists still like Emerging Markets, especially Emerging Asia as a growth story with more attractive valuations than the US. For most people there are still compelling reasons to include select international markets and companies in your portfolio.
Bonds and other Fixed Income investments have continued to really struggle this year as broad fixed income is down 2.7% for the year after lagging behind stocks considerably last year. Conservative and Balanced investors have had difficulty trying to determine how to balance the results and long-term growth expectations of the stock portion of their portfolios with the perceived stability (but disappointing results) from their fixed income investments. The urge to take on more risk than what is prudent becomes very common in the later stages of strong bull markets. It's important for us to use the risk/return scoring tools available to us to make sure we keep your portfolio in the range of your risk tolerance and risk capacity, while looking at all available asset classes and risk management tools to try to maximize risk-adjusted returns.
Please let me know if there is anything that you would like to discuss further related to your investment portfolio or your overall financial plan.
(Thanks to Main Management, Horsesmouth, JP Morgan, and Efficient Advisors for research on market & economic data charts & figures)