An object in motion tends to stay in motion… The recent news flow in both politics and the markets brings to mind Newton’s first law of motion. Trends can continue in the economy long past the time when we think they might fade. Here are three Q4 trends affecting investors as we head into the fourth quarter of 2019.
Trend 1: The Cost of Investing is Going to Zero
Charles Schwab has made another push to anchor the cost of buying and owning investments at zero. This week Schwab announced that stock, ETF, and options trades would be commission free. This is a great benefit to investors because cost is one of the few aspects of investing that is in our control. Custodians like Schwab, Vanguard, and Fidelity are providing investors with a way to access the markets in a low-cost way.
This could be bad news in the short term for some custodians who have continued to rely on commission income. For the financial industry, though, I think this helps in the long-term. Financial institutions will have to find ways to add value for their customers and earn money beyond the commodity of a trade. Innovators like Jack Bogle of Vanguard and Schwab’s eponymous founder started this trend 40 years ago and it looks like everyone else will have to race to keep up.
Full disclosure: Morton Brown Family Wealth uses Charles Schwab as a custodian for our client assets. For a firm like ours with a fiduciary duty, we like having partners who help us find ways to deliver results at a lower cost.
Trend 2: Interest Rates Continue Lower
Only 12 months ago, 10-year treasuries were paying over 3% while the S&P was hovering around 2,900. Now, 10-year treasuries are paying less than 1.7% while the S&P is still in the 2,900 range. The stock market is more expensive, and the bond market is more expensive. The uncertainty over trade and economic growth around the world has turned the Federal Reserve back to the trend of the last ten years: Low interest rates for longer.
If you are planning for retirement income, this is a reality that requires careful consideration. Your expected returns should be lower when the stock market is high and bond yields drop. If you have an income strategy based on the “4% Rule”, the math changes when the rate of return on safe money is low. It might be time to revisit your assumptions and make sure you know how you are invested for growth, income, and safety.
It is also important not to try and pick the timing and direction of interest rates. Remember, even the Federal Reserve itself expected to raise short term rates at least twice in 2019, but that was not to be.
Trend 3: Political Brinksmanship
There is little precedent for how the markets will respond to the possibility of impeachment. In modern times, we only have the scandals of Presidents Nixon and Clinton to show whether the potential removal of a President can cause the stock market to tip. In both of those cases there were trends in place before the presidencies were in trouble, and those trends remained in effect.
In the 1970’s, the stock market was in the middle of a lost decade and that continued after Nixon resigned. In the 1990’s, the stock market was amid a rally led by technology and the impeachment of Bill Clinton was not enough to change that. In fact, the stock market moved higher from the time Congress voted to impeach until the time the Senate rendered judgment.
We will be watching to see whether the Trump administration responds to this developing domestic story by changing policy initiatives, internationally. With internal turmoil in Hong Kong and a struggling economy, China had a weakening hand in negotiations already. Now, both the U.S. and China will need to navigate domestic political challenges while trying to reach a deal on trade. The longer this takes, the slower the economy gets. The slower the economy, the more incentive there will be for one side to blink.
These Q4 trends, both financial and political, present both risks and opportunities depending upon your circumstances. If you feel you need guidance as events unfold or help understanding your investments, contact us. We are always happy to have a conversation.