2018Q2 Quarterly Commentary

August 15, 2018

2018Q2 Newsletter

Quarterly Commentary

Market Recap

Although not quite as volatile, the second quarter was similar to the first in that it was a bit of a roller coaster ride that ultimately ended up — as roller coasters do — about where it started. The S&P500 was up slightly for the quarter at 3.4%. The strongest segments were the Russell 2000 (small cap), (up 7.8%) and Real Estate (up 7.8%).

The weak market returns belied relatively strong US economic growth and solid corporate profits.

On July 27, the Bureau of Economic Analysis showed that the US economy is firing on all cylinders. It announced that Real GDP increased at an annual rate of 4.1% in the second quarter. Likewise in early July, the nation’s supply executives in its Manufacturing ISM® Report On Business® announced that the overall economy grew for the 110th consecutive month.

In mid-June the Fed raised the fed funds rate from 1.5% – 1.75% to 1.75% – 2.0%. It did so on the grounds that “job gains have been strong. . .and the unemployment rate has declined.”

Table 1

Key Index Returns

S&P500 (Large) 3.4% 2.7%
Russell 2000 (Small) 7.8% 7.7%
EAFE (International) -1.2% -2.8%
MSCI Emerging Markets -8.0% -6.7%
Barclays Agg (Taxable) -0.2% -1.6%
Barclays Muni (Tax-Free) 0.9% -0.3%
DJ-Real Estate 7.8% 1.4%
Bloomberg Commodity 0.4% 0.0%

Although the unemployment rate subsequently rose slightly, in early May it fell to a remarkable 3.9%. The last time the unemployment rate was that low was at the end of 2000.

The biggest risk to the global economy continues to be the aggressive US trade posture. US efforts to confront China’s and Europe’s trade and investment policies are heightening global trade tensions. In a bit of good news on this front, in a White House meeting on July 25, President Trump and EU leader Jean-Claude Juncker de-escalated trade tensions, although it was unclear what was actually agreed.

The Eurozone economy has slowed sharply in the first half of the year, ending the period of solid growth experienced last year. A slowing global recovery and strong euro caused exports to fall in Q1 and GDP growth to slide.

In China, economic growth appears to be slowing as well amid its intensifying tariff battle with the US. As a result, China’s stock market turned negative for the year and the yuan dropped sharply. The currency rebounded somewhat as China’s central bank made comments suggesting that it sought stability in its currency.


Outside Perspectives

“Tuning Out the Noise”

Issue Brief

 May 1, 2018

 Dimensional Fund Advisors

For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors. Headlines from the ”lost decade” can help illustrate several periods that may have led market participants to question their approach.

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks in May 1999 and stayed invested, that investment would be worth approximately $28,000 today.

Exhibit 1

Hypothetical Growth of Wealth in the S&P 500 Index

Source: DFA, 2018

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.

The Value of a Trusted Advisor

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A recent survey conducted by Dimensional Fund Advisors found that (as shown in Exhibit 1), along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor.

Exhibit 1

How Do You Primarily Measure the Value Received from Your Advisor?

Source: DFA, 2018. The firm surveyed almost 19,000 investors globally to help advisors who work with Dinmensional better understand what is important to their clients.

Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.

Did you Know?

There are many rules of thumb when it comes to a safe withdrawal strategy during in retirement. Perhaps best known is the 4% rule developed by William Bengen, which posits that one can safely withdraw 4% of one’s investment portfolio (50% stock and 50% bonds) during retirement over a 30-year time horizon.

The Bengen Rule is a useful but limited tool. Retirees often live and enjoy retirement beyond a thirty-year period and historical returns are not always indicative of future returns. Further, many retirees end up withdrawing more than 4% per year as unexpected expenses arise.

Fortunately, the Vanguard Group has provided a more detailed analysis on sustainable withdrawal rates that not only measure the probability of reaching one’s goals, but also doing so in the most tax-efficient manner.

By applying a decision tree to a client’s situation, client’s success rates (that is their ability to not deplete investment assets over a 30-year time horizon, were greatly increased) improved by as much as 10%, depending on the particular withdrawal rate and asset allocation.

Keep in mind, Vanguard’s approach is not a panacea. When clients are in lower tax brackets, it will sometimes be beneficial to increase the withdrawal rate to either max-out the lower tax brackets and/or to convert tax-deferred assets to Roth tax-free assets, which helps offset future required minimum distributions. Further, for those clients with high incomes in retirement, Roth conversions taken before they begin RMDs at 70½ can help reduce their taxable income in retirement and thus reduce the higher Medicare B & D premiums that high-income earners pay.

Exhibit 1

Withdrawal-order decision process

Source: Vanguard, 2017

When developing a withdrawal strategy, Barnett Financial reviews your financial plan and determine the best withdrawal strategy that can accomplish your goals and deliver them in the most tax-efficient manner.

Send Us Your Tax Returns!

If you haven’t already done so, please send a copy of your completed 2017 tax return. Your tax return helps us serve you more effectively by allowing us to perform tax-loss harvesting and prepare your financial plan updates.

When sending your tax return, don’t forget to use the Tamarac document vault.

At Barnett Financial


Barnett Financial recently procured a license for Docusign to help make it easier for you to sign the non-Schwab forms we sometimes send you (e.g., the Diminished Capacity form and the Credit Reporting Initiative form).

Once we complete testing, we’ll start sending forms out to you via Docusign. Oh boy, more forms!

Internal Audit

Barnett Financial has engaged an independent auditing firm, Berkow, Schechter and Company, LLP, to conduct a routine examination of certain “held-away” client accounts (accounts that are not held at Schwab and for which we hold login credentials). Whether or not Barnett Financial is required to undertake this audit is unclear. However, we have proactively embraced this process as part of our commitment to following the highest set of standards regarding the treatment of your accounts.

Some of you  will receive a letter in the coming weeks from Chris, acting in his role as Chief Compliance Officer, asking you to confirm the accuracy of your held-away account balance and transactions.

Closing Thoughts

We at Barnett Financial hope you are enjoying your Summer. It’s a hot one, that’s for sure! If you’ll be visiting Austin, please let us know!