Market Commentary

October 10, 2018

George E. Steinemann, CFP®

Frank P. Sudal, CFP®, CFA

Trust Investment Management

Market Returns

	SEPT	YTD	12 Mo.		SEPT	YTD	12 Mo.
S&P 500 (US large cap)	0.57%	10.56%	17.91%	MSCI EAFE (foreign large cap)	0.87%	-1.43%	2.74%
Russell 2000 (US small cap)	-2.41%	11.51%	15.24%	MSCI Emerging Markets	-0.53%	-7.68%	-0.81%
BBgBarc US Aggregate Bond	-0.64%	-1.60%	-1.22%	BBgBarc US Corp High Yield Bond	0.56%	2.57%	3.05%

Source: Morningstar as of 9/30/2018

September

Favorable economic news continued to delight investors last month, and while the S&P 500 notched another small gain, developed foreign company stocks gained almost 1%. Beleaguered emerging markets continued to bleed, pressured by rising U.S. interest rates and concerns over how the next round of tariffs will affect their fortunes. The flip side of all this domestic prosperity is that 10-year Treasury rate spiked to 3.24% last week, which gives the Fed impetus to raise rates at their December meeting. Stock markets do well in low interest rate environments. With above-trend economic growth, a rising deficit (expected to exceed $1 trillion this year and for many to come), unemployment at historic lows, and wage growth running at 2.8% year-over-year as of September, we expect rates to continue their ascent. While the equity bull market has run a record nine years, more attractive bond yields will at some point seriously compete for investors’ favor.

VOLATILITY

While the term itself means “variability of returns,” investors most often associate it with markets falling, not rising. The past year has been notable for its absence in stocks, bonds, commodities, and currencies, according to Linda Duessel of Federated Investors. “With average weekly volatility running just above 2% - only 8% of the time has it been as low or lower since 1976…..Leuthold Group says the S&P has returned an average 3.27% the following year, with more than a 1-in-3 chance of an outright decline. Further, while the percentage of bullish newsletter writers last week jumped above the 60% threshold (indicating extreme optimism, a contrarian negative), the percentage of NYSE issues above their 30-week moving average dropped below 50% (indicating a narrowing market, a technical negative).” Contrarian negatives, technical negatives, it’s enough to keep you awake at night, which is why we continue to preach diversification and asset allocation.

Today

I began writing this after breakfast, when the market opened modestly lower. At the close, after taking a few hours from this project to play golf (after all, I’m retired!), I saw the Dow had closed down 831 points, its worst loss in eight months. I remember 1987 when it fell only 508 points to 1738, a 22% tumble, and people thought the world was going to end. I still feel 831 points is a big deal, but in percentage terms, it’s a mere 3.1%. However, with the Dow up 6.9% YTD as of yesterday’s close, it represents a large chunk of our year’s investment gains. So much for “low volatility.”

Milestones

Jim Saccardi, our former Portfolio Manager, and I began writing this monthly Market Commentary over sixteen years ago in October, 2006, with the mission of keeping clients engaged with our investment process and philosophy. Since Jim’s retirement in November, 2017, and mine last December 31, I have continued to author this with input from Frank Sudal, our current Portfolio Manager.

As of next month, I am relinquishing this cherished tradition to Frank Sudal, Jason Kuhnle, SVP of Wealth Management, and the rest of the team. Their day-to-day involvement with clients and the markets makes their insights better than mine, although I will miss initiating the monthly communication with all my former clients. As many of you know, my son, Travis, and I are embarking on a great adventure next March, sailing our Swan 44 sloop around the world starting in Southern California via the South Pacific, northern Australia, Bali, the Cape of Good Hope, Barbados, and ultimately Newport, R.I. by summer, 2020. I am trucking my sailboat from Ohio to California in two weeks, and my wife and I will live aboard from November to March, cruising the California coast, where we lived for 20 years prior to moving back to Sandusky. She will join the boat by flying in and cruising with us through the more exotic locales like Fiji and Tahiti, but eschews the 2000+ mile open ocean passages, for some reason.

I wish all of you the best, and thank you for your many years of entrusting your investments to Civista and my team.

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