GSR Capital Management 2Q 2019 Newsletter

What a difference three months can make.  At the end of 2018, investors were racing for the exits as stock indexes around the world plummeted.  Three months later, the S&P 500 index booked its best quarterly performance since the 3rd quarter of 2009.  Kudos to those investors who stayed the course, or better still, put new cash to work when the news headlines were doom and gloom. 

 So what changed?  The Federal Reserve. In late 2018, it was signaling its intention of continuing its policy of raising interest rates over the foreseeable future and reducing its balance sheet (meaning, reducing the vast amount of bonds it had acquired as part of its economic stimulus program).  This policy eventually led to a flattening of the yield curve and the tanking of stocks.  The financial markets spoke and the Fed listened.  In early January, the Federal Reserve indicated it would exercise more restraint in raising rates.  Then in March, it made a 180 degree turn from its late 2018 policy when data showed that most senior Fed officials did not expect to make any rate increases in 2019.

 I believe this major policy shift by the Fed was the primary contributor to the positive performance of both stocks and bonds in the 1st quarter.  Domestic stocks as measured by the S&P 500 were up 13.7%, the MSCI EAFE index of established foreign economy stocks was up 10.0%, and the MSCI Emerging Market index was up 9.9%.  Bonds too benefitted with the  Bloomberg Barclays U.S. Intermediate Government/Credit index up 2.3%.

 Last week I attended a conference in Boston put on by a very highly regarded research firm based in Florida.  Attendees included money managers not only from around the U.S., but from around the world.  Several of the speakers reinforced my belief that economic growth and financial market return expectations going forward should be lower than what we have witnessed over the past 40 years.  Recall that interest rates peaked in 1981 and have largely been in a long-term downtrend ever since.  Falling interest rates are a tailwind for economic growth and stock and bond market returns.  With interest rates being at historically low levels, this tailwind is behind us.  Using a variety of data to substantiate their theses, the conference speakers shared their views that economic growth potential in the U.S. currently stands at 1.2% and return expectations for the S&P 500 are in the low to mid single digit range. Both of these are well below long-term historical averages.  When you combine these with increased longevity, the challenges facing investors warrant a well researched investment strategy and thorough financial planning.

March of 2019 marked the 10 year anniversary of the bull market in stocks that began in March of 2009 following the Great Recession of 2008.  Over the course of 10 years, stocks as measured by the S&P 500 were up a whopping 255% on a price basis through the end of March (not counting dividends).  Admittedly, most stock indexes did not fare nearly as well during this time period.  But, it is worth mentioning that during this rally the S&P 500 experienced declines off their highs of 17% in 2010, 22% in 2011, 15% in 2016, and most recently 20% in 2018.  Patient investors have been rewarded for their fortitude. 

 While many naysayers continue to call for the bull’s demise, bull markets do not die merely due to old age.  How much longer this rally can run is anybody’s guess, but I’m inclined to abide by the market axiom that says you don’t fight the Fed.  In essence, this means if Fed policy is restrictive, invest cautiously; if Fed policy is accommodating, invest more aggressively.  While it seems stocks should be due for a pause given their steep ascent since the end of December and the S&P 500 now approaching its all-time highs, given the backdrop of the accommodative Fed, tame inflation, and still positive economic data, my near-term outlook remains optimistic.



Glenn S. Rank, CIMA®

Certified Investment Management Analyst®



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·         The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively.  International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors.  Investing in emerging markets can be riskier than investing in well-established foreign markets. The Bloomberg Barclays Capital U.S. Intermediate Government/Credit Bond Index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years. Inclusion of these indexes is for illustrative purposes only.  Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance.  Individual investor’s results will vary.

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