by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management
As we close out another Thanksgiving week, investors have a lot to be thankful for this year. At this time last year, the Fed was still raising interest rates, global economies were slowing and the S&P 500 was on its way to a negative 13.5 percent return for the fourth quarter. Roll ahead 12 months and stock markets around the world are setting new all-time highs. If we can maintain these levels through the end of the year, this will be the best year for a 60 percent stock/40 percent bond portfolio since 1998.
Early this year, Fed Chairman Jerome Powell made his famous Fed pivot. He announced that the Fed was no longer raising interest rates and might be open to cutting interest rates later in the year if a slowdown in the economy warranted it. That was indeed the case and the Federal Reserve had lowered the federal funds rate three times this year. This has hugely helped the stock market this year.
Taxable bonds have also rallied in 2019. Bond returns, depending on which index you are measuring, are up 10 percent this year. That’s amazing when you consider that the 10-year Treasury came into the year yielding 2.74 percent. Today the 10-year Treasury yields 1.78 percent. That nearly 1 percent drop in long-term interest rates has led to an increase in value of those bonds. When bond yields are low, the rise and fall of interest rates have a bigger effect on total return than when bond yields are higher. This means that at current levels, that bonds are more sensitive to rising and falling interest rates than almost any time in our history. Municipal bonds have been a different story. While they have also rallied this year, they are much less volatile than government or corporate bonds. They have only risen 5 percent so far this year.
Thanksgiving Inflation
Inflation is one of those topics that is always on investors’ minds. There are many ways to measure inflation, and many have come under scrutiny from investors for understating actual inflation. Our friends at JP Morgan came up with the Thanksgiving inflation measure. According to the American Farm Bureau, the average cost of a Thanksgiving meal is essentially unchanged from last year. As you can see from the accompanying chart, a rise in sweet potato and milk prices was offset by a steep fall in turkey prices.
Source: American Farm Bureau, JP Morgan
Week in Review and Our Takeaways:
Investors have a lot to be thankful for, with record highs in the stock market and the best-balanced returns since 1998
We wish everyone a Happy Thanksgiving and a wonderful Holiday season