Quarterly Thoughts (3rd Quarter 2019)

Mark Meredith, CFP®

The 3rd quarter is a wrap! How’d markets do?

First thought: Framing is everything

You may look at the quarterly return of a diversified portfolio and think “meh”, the year to date return would make you ecstatic, and the return since February 1st of 2018 would frustrate you. Say you put one third each into the above asset classes on 02/01/2018, your grand cumulative return through 09/30/2019 would have been about 2.80%. Yes a CD would have been better in hindsight, although if we can make hindsight decisions you would not have bought a CD but rather Advanced Micro Devices stock which has gained 133% since then.

It’s true, US stocks are up 19.90% for the year. But from 05/01/2019 – 09/30/2019 they are only up 1.15%, and foreign stocks are down 1.63% during that same time horizon. Nearly all of the 2019 return for stocks so far came in January – April. Can you imagine if an investor bailed during December of 2018 when the market had fallen substantially and missed this subsequent recovery?

You could have invested $10,000 in US stocks on 01/01/2000 and it would have grown to somewhere around $31,122 by the end of September 2019. Ironically, you could have invested $10,000 in stocks on 01/01/2010 and it would have grown to $31,978 by the end of September 2019 (Credit on this statistic goes to financial blogger Ben Carlson, which is similar to one he posted recently). This shows you how bad the period of 01/01/2000 – 12/31/2009 was for US stocks (it was not too bad of a period for small cap value or foreign stocks however).

Keeping things in perspective is important. When the Titanic hit an iceberg, sure there were thousands on board panicking. But the lobsters that were about to be cooked in the kitchen thought it was a miracle.

Second thought: Impeachment

I’m sorry I have to even mention this as you all are probably sick of hearing about it, but I do feel obligated to comment with respect to your financial plan.

Most people are going to believe what they want to believe about this whole ordeal. A very small minority of people will look at things objectively. Have an Elizabeth Warren voter and a Trump voter read the entire transcript of the phone call with the Ukraine President, and you will get wildly different interpretations.

Will Trump be removed from office? Probably not.

Will this impeachment process impact your portfolio? Probably not.

Am I a political analyst? No.

Can we move on now? Yes.

Third thought: Zero commissions, but not “free”

There was pretty interesting news last week in the financial world. Charles Schwab announced the morning of October 1st that they were removing all commissions from online trades on stocks, ETFs, and options. Later that day, TD Ameritrade matched their offer!

The race to zero has been an incredible thing to observe, and you could argue that a much smaller company, Robinhood, helped us all get there. But wait, how exactly are these brokerage firms going to make money?

First thing, mutual fund trades will still cost money, so there is still revenue there.

Second, revenue sharing from mutual fund and ETF providers to be included on these platforms is not peanuts.

Third, exchange orders are sold. If you go to buy a stock or ETF, that “order flow” is being sold to a third party. This isn’t necessarily a bad thing for investors, as there is fierce competition to buy that order flow and it does lower costs for us overall. Fun fact, the concept of selling order flow was pioneered by Bernie Madoff!

Fourth, idle cash in your brokerage account is paid very little interest but is lent out at much higher rates. These brokerage firms are effectively making money on the net interest spread, similar to a bank would.

At the end of the day, if you are a low activity investor with very little cash in your account, this is a win.

Final thought: Interesting Chart

The chart below is from Mark Perry, who is an economics professor at the University of Michigan. There are different interpretations of what we’re seeing here.

Some will argue the red lines are where we see the most government involvement/funding/regulations. There is also the argument that the red lines represent the essentials whereas the blue lines are non-essential items, thus subject to price competition. Maybe it’s a combination of many forces at work.

I do remember quite well when a flat screen “HD” TV was thousands of dollars, and now I think the Lions Club hands them out at stop signs when you give them your loose change.

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