As the summer winds down and fall fast approaches, we turn our attention to the upcoming presidential election, as it’s sure to add volatility to what has been a relatively quiet period for the stock market. We have enclosed a very interesting piece from Morningstar, "Politics and Investment Performance" that outlines average annual returns from 1926-2015, when we have had a "unified government; a partially divided government; and a completely divided government." It’s hard to believe, but by the time our next quarterly letter reaches you, we will know who will be the 45th president of the Unites States.
As you read in our last quarterly newsletter, our goal each quarter is to update you on the stock and bond markets and take a look at the overall health of the economy. Through the end of September, the S&P 500 Index is up close to 6% for the year. Not exactly the 10% long run average return since 1926, (although we still have 3 months left in 2016) but very much in line with our thinking of what may be lower annual returns for stocks over the coming years. More realistic may be 6-8% annual average return for stocks, going forward.
Another piece we’ve included shows a chart on the Vanguard S&P 500 Index Fund, which just celebrated its 40th anniversary in August of 2016. It shows a $10,000.00 investment in 1976 that had grown in 40 years to $617,793.11, simply by reinvesting dividends and holding the fund through the ups and downs of the market! Sure, the next 40 years may very well be different but don’t forget, during the last 40 years we have seen Wars, Terrorism, Black Monday, Dot.com Bubble Bursting, and the worse financial crisis since the Great Depression.
This post-recession expansion, now in its eighth year, can certainly continue as consumer spending accounts for roughly 70% of U.S. economic activity and consumers are certainly spending, albeit in a more disciplined way since the last financial crisis. Gross Domestic Product, which is a measure of the value of goods and services produced, has cooled a bit and is now running at about 1-1.5%. It now appears that a 2% GDP Growth may be a stretch for this year, with 1.5% GDP a more likely full year expectation. Keep in mind, the long run average GDP rate in the United States, from 1947-2016, has been 3.22%.
Does the theme sound familiar, with numbers running below long term averages? While a recession does not seem imminent, it’s possible we stay stuck in this slower growth regime for the coming years.
Interest rates have continued to remain at very low levels. The Federal Reserve made its first move in December 2015, raising interest rates a quarter point. The 10 Year Treasury yield continued to fall, hitting a historic low of 1.375% on July 5, 2016. However, it’s quite possible that we’ll see the next quarter point increase when the Fed meets again in December, 2016.
While it appears that the US economy could very well withstand slightly higher rates, interest rates around the world in other developed economies have slipped to all-time lows. Government Bonds of Germany, France, Italy, Switzerland and Japan are all seeing negative yields on the shorter side of their yield curve. What all this means is that interest rates may in fact stay low for a longer period of time. That certainly does not mean they will not move up a bit, but it may be sometime before we get back to interest rates we were accustomed to in the early 2000s. It is interesting to note that many believe this extended period of extremely low interest rates will probably turn out to be the cause of the next recession.
Now may be a great time to look at your own portfolio and make sure that you’re still comfortable with the level of risk inside that portfolio. Maybe you are very concerned about the election and wish to draw up a bit of cash that you may need in the coming months, should short term volatility set in. Working with you we have always stressed the need to have money on the Fixed Income side to draw on during downturns in the stock market. Although no one knows exactly when a downturn will come, we do know that it will. Our belief is still that a balanced portfolio should continue to serve you well in the years ahead.
Here at Pearson Financial Services, our Investment Committee meets monthly to review the changing landscape of the economy, along with continuous research on the core holdings that we recommend from Vanguard. The Investment Committee is made up of a team of professionals with some of the most respected designations and includes Bryan W. Bastoni, CFP; William Lord, CPA, CFA; Louis J. Beaulieu, ChFC, AEP, CTFA; Christopher Dupee, CPA; Kathleen Fowler, Esq. and John Ward, MA, MBA.
As many of you know, we are optimistic in the belief that the best days lie ahead for this, the greatest nation on earth. We continue with the hope to see your children, grandchildren and great grandchildren have a life with many of the same opportunities that you have had, but I know at times it’s tough to see the glass half full, especially with everything going on today.
We hope that you can take the time to enjoy this fall’s beautiful weather and then enjoy the upcoming holidays with your friends and family. Please remember to let us know if, and for how long, you will have a different mailing address for the winter months. As always, if you should have any questions or concerns at all, please do not hesitate to call.
Bryan Bastoni, CFP