Financial Market Commentary – 3rd Quarter of 2018


It’s All a Matter of Perspective!  

As US equities enter into the longest bull market for stocks in modern history, the question I have been asked most frequently is, what happens next? Is a stock market crash imminent, or is this bull market different and capable of running even longer? If my crystal ball worked perfectly, and I assure you it does not, I could tell you how much time the US economy has before the next recession. Even then, if I saw a recession coming, what would I do differently with my and your investments? I am going to try to answer these questions with a brief story. The short answers are, I do not know how much longer until the next recession but I would not change much when markets do decline.

Recently, my mother-in-law, Barbara, passed away at age 81. For my wife and me (I had known Barb for 39 years), my wife’s six siblings and many other family members and friends, the sudden loss and funeral proceedings were a very sad time. However, to one of Barb’s great grandchildren, my four-and-a-half-year-old grandson, Peter, the funeral was going to be a great day! After questioning his mom in detail, he told his preschool teacher the day before the funeral how excited he was to be going to a funeral. His teacher said, “Peter sometimes funerals can be sad. Are you sure you’re not sad?” Peter answered, “No way! I get to see my aunties (his mom’s five sisters), I get to see Great Grandma in a big box, I get to see some huge stones and then we have lunch!” Peter’s perspective on the funeral helped many of us celebrate Barb’s passing in a more positive light.

The next economic recession or US stock market decline will not be the last and will not be a “funeral.” It is a cycle that has repeated itself for centuries. Sometimes downturns happen fast, maybe after a three-year expansion. Sometimes the expansions are longer; this one is over ten years old. Sometimes the correction is modest (down only 20%), while other times, the pain is worse. An investment company, MFS, recently published the following:

“During the 30 years ending 8/31/2018, the best 12-month performance and the worst 12-month performance for the S&P 500 Index occurred over a single 24-month period. The worst 12 months (a total loss of -43.4%) was the one-year period from 3/01/2008-02/28/2009 and the best 12-months (a total return gain of +53.6%) was the 1-year from 03/01/2009 to 02/28/2010.”

So, the funeral in the S&P 500 Index was followed by a party for the index a year later. Those who sat through both were sad for a while but rewarded in the long run. Here, at BFA, we are well-diversified before the next market correction, but some assets will drop in value when that correction occurs. However, we know that by staying invested and diversified, we will weather current and future storms and be better off in the long run.

What is Working so far in 2019?

For all the crazy headline national news, the economy has been strong. Unemployment is low, inflation is tame, interest rates are low, taxes are low and corporate profits are strong. All of this has been good for US stocks but not much else. Through September, the S&P 500 Index (large-cap stocks) was up 10.6% and the S&P Midcap 400 Index was up 6.3% YTD. The S&P Small Cap 600 Index, thought to be less susceptible to tariff wars, was the big winner, up 14.5% YTD. Performance was not as rewarding in most other asset categories. Developed country foreign stocks were down -1.4% YTD. Emerging market stocks were down -7.7% YTD as they were negatively impacted by the strong US dollar. Fixed income investments (bonds) have continued to struggle as the Federal Reserve steadily increases interest rates. The Bloomberg Barclays US Aggregate Bond Index was in negative territory, down -1.6% YTD. Municipal bonds (tax-free) did a little better, only down -0.40% YTD.


We are heading into what is traditionally a good season (the fourth quarter) for the stock market. I do not see anything in my crystal ball that would make me expect anything different for the last three months of 2018. Please remember, we are always reviewing your investments and fine-tuning them when we can. We remain committed to being well-diversified (based on your investment objectives) and strive to select the best investment vehicles for each asset category. In my 32 years in the investment business, I have been through many market corrections. We do our best to survive them, but I am trying to think more like Peter, my grandson. I am looking forward to the next party after the correction that has not even occurred yet!

Looking forward to fall, Mike.

 Mike Kauffelt, CFA

Co-CIO, Bill Few Associates, Inc.

 Sources: Bloomberg, FactSet, MFS, Morningstar and The Wall Street Journal

Contact Michael K. Kauffelt, II, CFA

North Hills Address
107 Mt. Nebo Pointe
Suite 200
Pittsburgh, PA 15237
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740 Washington Road
Mt. Lebanon, PA 15228

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