One of the things that occupied my time while I was growing up was the sport of Baseball. Like so many of my friends I was certain to be a major league ball player. I memorized some of the very most basic concepts of playing ball – keep your head down while fielding grounders and “watch the ball into your mitt”. I was fearless about catching grounders until one day while watching the ball into my mitt, the ball hit a divot and I caught the ball with my eye. It was that experience that caused me to have serious reservations about keeping my head down and watching the ball into my mitt.
Another mantra I heard often was “keep your eye on the ball”! While this bit of wisdom had application to fielding, it was most often used when I was in the batter’s box. While the admonition is simple, the intent of the words was to keep me focused on the ball and not on the other action going on in the field such as the base runner’s lead, the pitcher’s wind up and the trash talk from the catcher, etc. Keep your eye on the ball – timeless advice that has application in our investment world today.
We are getting bombarded by headlines, theatrics and stories that come at us so quickly, it is sometimes hard to keep them all sorted out. Tariffs or the threat of tariffs seems to be all the rage in Washington. In case you get tired of international economics, you can get a full load of the “latest” on Supreme Court Nominee Brett Kavanaugh. While on-deck will be the mid-term elections, complete with all the implications and changes that it will bring with it. News seems to move so rapidly across our screens that it is a wonder our eyeballs, let alone our brains can keep up. So, it is a good time to remind ourselves; at least from an investment standpoint, to keep our eyes on the ball.
Staying consistent with keeping our eye on the ball, let’s review where we stand on three key pieces of data that play important roles in determining the landscape of the investment environment – U.S. GDP, Interest Rates and the Stock Market.
Like a pitch that gathers steam as it approaches home plate, the U.S. economy is gathering momentum. First quarter GDP was a positive 2.2%, followed by the second quarter’s number of 4.2%. Third quarter GDP is estimated to rush by at a rate of 3.6%. Adding those numbers together brings us to an average growth rate of 3.3%. Our forecast made back in January was anticipating a growth rate for the year of 3.0%. If the fourth quarter delivers a 2.0% rate of growth we will hit the three percent growth target we forecasted.
It seems to us that barring any kind of unforeseen major disruption, we will have the strongest economic growth rates in over a decade. Plenty of people and groups will all claim they are
responsible for the good news. Regardless of who you decide to award the glory for the impressive growth, let’s enjoy the moments and remember to keep our eye on the ball. At some point the growth rate will begin to decline and we want to notice when it does.
Prices are moving higher – homes, apartment rents, health care, gasoline, food, restaurant prices, wages, mortgage rates – just about everything has a bit of an upward hop or skip to it. However, I can think of one price that has moved down – Cannon Capital has lowered its starting fee quote for advisory services from .95% to .80%, that is an over 15% reduction in price – our way of saying thank you to the folks we owe our success to - our clients.
Higher prices translate into a higher inflation rate, which in turn lead to higher interest rates. The Federal Reserve Board has raised short term rates three times this year and seems to be ready to do one more before year end. We projected the U.S. Treasury 10 year Note to reach a yield of between 3-3.25% by year end. Currently we are at a 3.08% yield and we believe that rate will move higher by the close of the year. We have sold all but our inflation-protected bond fund and reinvested our fixed income money in a laddered U.S. Treasury allocation from nine months to two years in duration. We will use this strategy to collect higher short-term rates while we wait for the yield increase to run its course.
The S&P 500 index of stocks has recorded a 10.56% total rate of return, with dividends reinvested, through the first three quarters of the year. We felt this index would generate a return around 8-10% for the 2018 year. We think the stock market will finish out the year on a strong note. While large tech companies have led the charge thus far, we believe there is room for mid-size U.S. based companies to move higher and that international companies have lagged by more than they should. We are keeping our current asset allocation in place and we are confident we have our eye on the ball and like how it is looks to us.
Fall is such a magnificent time of year – if you don’t live in the Hurricane beltway. Temperatures begin to moderate, leaves change color, sports games are plentiful and Congress usually has vacation to provide us some relief from those shenanigans. We hope you can enjoy this season – we will keep our eye on the ball while you keep your eye on the natural beauty of this season.
Thank you for the opportunity to work with you!