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Market Commentary: First Quarter 2019

Market Commentary: First Quarter 2019

March 31, 2019
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Executive Summary

What a difference one quarter makes. The Dow Jones and S&P 500 posted their worst December performance since 1931. The NASDAQ had its worst December on record.1 Most major asset classes posted negative results in 2018. U.S. stocks double digit decline in the last quarter of 2018 led to their worst year since 2008. Just when we thought the “Market Grinch” stole Christmas, the New Year rang in the S&P 500’s best start to the year since 1998.2 Accompanying this rise were the Dow at 11.2% and the NASDAQ at 17.4%.

In our last Market Commentary, we wondered whether the economy was entering a recession. We were in the late stages of the business cycle with global economic growth slowing, but the strong first quarter market rebound helped allay investor recession fears. This market seesaw reflects more a market event than an economic one. In other words, a correction without a recession.

Inverted Yield Curve

On Friday, March 22, 2019, the 10-Year Treasury yields moved below the 3-Month Treasury bill yields. This marked the first time the yield curve inverted since 2007, prior to the financial crisis.3

An inverted yield curve occurs when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. It's an abnormal situation that often signals an impending recession. In a normal yield curve, the short-term bills yield less than the long-term bonds. Investors typically expect a lower return when their money is tied up for a shorter period. Investors naturally demand a premium to compensate them for the increased risks of owning longer-dated bonds.

During so-called “normal” economic conditions the yield curve has an upward sloping shape. A steep, (upward sloping), curve is typically associated with high expected rates of future growth or inflation, while a flat curve may signal the opposite. Inverted yield curves are rare and do not mean a recession is imminent, but that present conditions make a recession more likely.

Central banks typically raise rates during expansions and lower them to avoid slowdowns when conditions warrant. This does NOT mean it is time to sell equities. It is important to note that the lag time between a negative spread and the onset of a recession can be months or years.3 Companies are still earning profits and GDP growth remains positive. While we are late in the business cycle, it could be a long time until it officially ends.

The National Debt RISC

There has been a noticeable increase in the number of articles written recently about the sovereign debt levels both here and abroad. Some economists maintain that the U.S. need not worry about the growing size of our national debt.  They argue that when the interest rate on government borrowing is below the economy’s growth rate, financing the debt should be sustainable. They go on to postulate that interest rates will probably stay low for quite some time because of demographics. This assumes inflation is indefinitely dormant.6

Modern Monetary Theory (MMT)

MMT advocates argue that the Government should use fiscal policy to achieve full employment, creating new money to fund Government purchases. The primary risk once the economy reaches full employment is inflation, which they believe can be addressed by raising taxes and issuing bonds to remove excess money from the system.

Under this economic theory, national debt never needs to be repaid and no amount owed is too big. In fact, former Federal Reserve Chairman, Alan Greenspan, said, “The United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”7

Labor shortage, protectionism-related trade issues, nationalism, and the magnitude of “fiat currency” created globally since 2008 all create inflationary pressures, not just full employment as MMT prescribes. We believe this theory to be flawed.

Fiat Currency

  On June 5, 1933, The U.S. went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold.4

Fiat money is an intrinsically valueless currency that has been established as money by Government regulation. Since the U.S. dollar was decoupled from gold by President Richard Nixon in 1971, a system of national fiat currencies has been used globally.5

In lieu of gold-backed currency, the U.S. Government declared a legal tender like an IOU backed by the full faith and credit of the Government. “Fiat” derives from Latin, meaning “let it be done”. In this sense, money is decreed. Money is created out of thin air and is not convertible into any “thing”, such as gold.

Can the Government Deficit Spend Forever?6

Deficit spending may work in the short term with no thought to paying back the debt. Ignoring the longer term is what makes it so easy to run up these debts. Even if the world were to continue to lend us money indefinitely – a questionable assumption in an age of nationalism – paying the interest on the debt becomes relatively debilitating, particularly when deficit spending surges by 17% as in FY18.

We believe interest rates are going to generally rise through the next 10 years because we are heading toward higher rates of inflation. One could argue that the demographics of the U.S. may temper inflation. This is overshadowed when considering the aging population is consuming more and more health care and Social Security dollars. The Federal Government must come up with the money to pay for these entitlements. Whenever the Government spends money, the means to do so are:

  • Raise taxes (tax the rich more and more)
  • Inflate your way out (buy what you want using cheaper dollars)
  • Stop spending the money on other programs (prioritize and shrink government)
  • Change the benefits structure (baby boomers and others take a haircut)

Any or all of these factors will be needed to tackle the debt. Our financial platform needs serious overhaul to address both reducing the national debt and deficit spending which adds to that debt.

  • If the premise is that it is okay to live beyond our means because we will never have to pay back the loan, the opportunity cost associated with the interest expense incurred by the Federal Government must still be considered. The debt is not harmless. We can get by tomorrow and likely the next several years. But eventually the reality of it all will become painful enough to require change.

What Does This Mean for Clients?

First and foremost, this does NOT mean panic. There are strategies, some of which are painful. This issue can be kicked down the road for some time still. Most importantly, our advisors are well versed in risk management and know how to adjust portfolios and assets as economic conditions shift.

  • Our country’s early pilgrims came here for a new life founded upon principles of self-reliance. At Gatewood Wealth Solutions, we are on a mission to share our expertise with client families, helping them become and remain financially self-reliant, so they can give purpose to their money. We believe that when we help clients grow and preserve their wealth that we help society.
  • One thing I have learned from living in our amazing country is that we are a resilient nation. As my dad used to say, “When the going gets tough, the tough get going”. The going will get tough at some point, and change will occur to address our national debt.

Rational Optimist

For two hundred years the pessimists have dominated public discourse, insisting that things will soon be getting much worse. But in fact, life is getting better, and at an accelerating rate. Food availability, income, and life span are up. Disease, child mortality, and violence are down across the globe. (Violence only appears to be increasing because cameras are on every corner broadcasting events as they unfold.) Africa is following Asia out of poverty; the internet, the mobile phone, and container shipping are enriching people’s lives as never before.

In his book, “The Rational Optimist: How Prosperity Evolves”, Matt Ridley describes how things are getting better. (8) This is a bold and bracing exploration into how human culture evolves positively through exchange and specialization. Ridley’s work is astute, refreshing, and revelatory that covers the entire sweep of human history from the Stone Age to the Internet.

We agree with this view and take his findings in consideration for portfolio management and financial planning decisions which help lead to better financial outcomes for client families.

Inflation & Gold

We have been in a low, even deflationary, trend which is likely to continue through 2019. Our longer-term projection of inflationary pressures causes us to consider Gold as a long-term hedge. Assuming we are in a general global economic slowdown, the result should be diminished demand expected for Gold. This should be reflected in Gold Futures Prices and wholly consistent with business-cycle influences. Electrical Equipment Production, Semiconductor Production, Computers, and Jewelry are all likely to contribute to a relaxing in the demand pull for Gold, thus resulting in downward pressure on Gold Futures Prices. (9)

Commodities and precious metals, more specifically Gold, tend to do well during inflationary periods. Commodities are one of the nine asset classes we utilize in our portfolio management. For those interested in investing in commodities as an asset class and future inflationary hedge may want to consider whether Gold belongs in their overall portfolio.

Please remember that we are not providing you with a guaranteed forecast of Gold Commodity Prices, but rather an analysis of how gold prices normally work within the context of the business cycle. Gold prices also tend to be driven by emotive factors which are sometimes separate from business-cycle economics. Individual investment results may vary.


While the global economy is slowing, the first quarter stock market performance shows that investors remain confident. This is in part due to the Federal Reserve’s “go slow” approach to raising its benchmark rate.

Though the Fed has said it was unlikely to raise its rate this year, the White House has started pushing for a rate cut. On Friday Larry Kudlow, the National Economic Council Director, urged the Fed to lower its rate by a half a percent to boost US economic growth, “as a precaution.” President Trump doubled down, tweeting that GDP and stock prices would be “much higher” if the Fed hadn’t “mistakenly raised interest rates.” Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, responded Friday by telling The Wall Street Journal, “I don’t think we should be overreacting to short-term data.” Nonetheless, the CME Group now estimates that there’s a 71.1 percent chance of a rate cut this year. (13)

Completed and upcoming IPO’s in 2019 such as Lyft, Pelton, Pinterest, Airbnb, Slack and Uber also signal a healthy market should continue. (14)

As always, this commentary is written to give you an overview of last quarter’s market and economic conditions. We cannot predict the future. Rather, we use this information to help our client families make decisions to help them achieve better financial outcomes.

Volatility cannot be defeated. Portfolio values will go up and down. As acclaimed 50-year financial professional, Nick Murray says, “Equity returns have to be earned. They can only be earned by investors willing to hold them through the whole market cycle. And that means having the temperament not merely to accept but to embrace ‘volatility’.” (15) As we mentioned in last quarter’s Market Commentary, Bear Markets occur every five to seven years on average. We will have periods of negative returns, but our advisors are here to help client families manage down market risk so they can accumulate and ultimately retire with confidence.


(1) FOX Business, “Dow, S&P 500 Post Worst December Since 1931, As Nasdaq Has Worst On Record”, Suzanne O’Halloran, 12.31.2018 -

(2) CNBC, “Here are the winners and losers from the stock market’s first quarter of 2019”, Fred Imbert, 03.29.2019 -

(3) WMC Insights, “The Yield Curve Inverted – Now What?”, David Humphreys, 03.27.2019.

(4) Editors, FDR Takes United States Off Gold Standard, 02.27.2019 - takes-united-states-off-gold-standard

(5) Wikipedia, Fiat Money -

(6) ITR Economics, Insights from Our CEO: Some Argue the National Debt is No Issue, Brian Beaulieu, 02.20.2019 -

(7) Wikipedia, Modern Monetary Theory -

(8) “The Rational Optimist: How Prosperity Evolves”, Matt Ridley – 06.07.2011 Prosperity-Evolves-P- s/dp/0061452068/ref=sr_1_1?hvadid=243047715573&hvdev=c&hvlocphy=9022860&hvnetw=g&hvpos=1t1&hvqmt=e&hvrand=8137 62931933520404&hvtargid=kwd- 315851213440&keywords=the+rational+optimist%27+by+matt+ridley&qid=1554216242&s=books&sr=1-1 ;

(9) ITR Economics, From the President’s Desk: That “Precious” Metal, Alan Beaulieu, 03.12.2019 -

(12) The following describes the asset classes that are referenced in these market commentaries and which make up the asset classes in our portfolios.

The U.S. Large Cap asset class is measured by the S&P 500 Index, which is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The U.S. Mid Cap asset class is measured by the S&P Mid Cap 400 Index, which is the most widely used index for mid-sized companies and covers approximately 7% of the U.S. equities market.

The U.S. Small Cap asset class is measured by the S&P Small Cap 600 Index, a market value weighted index that consists of 600 small-cap U.S. stocks chosen for market size, liquidity and industry group representation.

The International Developed Markets asset class is measured by the Morgan Stanley Capital International Europe, Australasia, and Far East (MSCI EAFE) Index, which is composed of all the publicly traded stocks in developed non-U.S. markets. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The International Emerging Markets asset class is measured by the MSCI Emerging Markets Index, which is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

The Real Estate asset class is measured by the Dow Jones US Select REIT Index. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

A Real Estate Investment Trust (REIT) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, REITs are required to distribute 90% of their income, which may be taxable, into the hands of the investors. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.

The Commodities asset class is measured by the Bloomberg Commodity Index (BCOM), formerly the Dow Jones-UBS Commodity Index, which is a highly liquid, diversified and transparent benchmark for the global commodities market. It is calculated on an excess return basis and reflects commodity futures price movements.

The Global Equity Index as referenced in this report is the combination of the equity indexes listed above in proportion to Northwestern Mutual’s strategic asset allocation model for the equity aggressive model and as reported by Morningstar Direct as of 06.30.2018.

The Barclays U.S. Aggregate Bond Index, formerly the Lehman Brothers U.S. Aggregate Index, which is an index of the U.S. investment-grade fixed rate bond market, including both Government and corporate bonds, measures the Taxable Fixed Income asset class.

The Barclays Municipal Bond Index, which is a rules-based, market-value weighted index created for the tax-exempt bond market, measures the Tax-Free Fixed Income asset class, i.e. “muni bonds”.

(13) Northwestern Mutual Weekly Market Commentary, Financial Markets Commentary, For the Week of 01.01.2019 -

(14) Market Smith by Investor’s Business Daily, “These Five Big-Name IPO’s Could Rival Dot-Com Era – If They Wanted” – Brian Deagon, 11.09.2019 -

(15) Around the Year with Nick Murray: Daily Readings for Financial Advisors, by Nick Murray, The Nick Murray Company, Published 2016 -