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Economic Resilience Conquers All

Posted October 3, 2018

Despite all the news that could be so distracting, investors are focusing on U.S. economic strength to rise above the breakdowns in global trade and Washington politics. For the 2018 second quarter, the U.S. corporate earnings growth rate came in 25% higher than it was a year ago, and earnings growth estimates for the third quarter, just ending on September 30, are coming in at around 20%. On October 1, from the White House Rose Garden, Trump announced a new trade deal between the U.S., Canada, and Mexico; markets are up on the news.

Tariffs, Rate Hikes, and Jobless Claims

Investors are observing that the tariff activity so far is not having the expected negative effects on the stock market. Investors view the latest Federal Reserve rate hike on September 26 as a tip of the hat to U.S. economic vigor. Jobless claims have fallen to a 49-year low.

International Diversification

For our clients with international stock exposure, the latest period has been a difficult test of patience. Jason Zweig, personal finance columnist for The Wall Street Journal, wrote on September 29: It makes sense to add international stocks to a U.S. portfolio, probably more so than ever. Mr. Zweig continues: In the 1970s and 2000s U.S. stock market returns were among the worst in the world, and they were below average in the 1980s.

Today, international stocks offer good value, as they are a bargain to buy on an earnings basis compared to U.S. stocks. September brought some good returns, as most of our international positions were positive for the month. Diversification is based on the principal that no one knows when the trend will shift back to international markets to produce the best returns.

Bond Diversification

The 10-year treasury yield moved up in September from 2.85% to 3.06%. The market value of bonds fall when yields rise — so following a positive return in August, bond performance in September is mostly negative. Most of the return of bond funds comes from yield. We practice active management of bond funds as opposed to bond indexing, because we control the duration of the bond portfolios and the credit quality to optimize income, stability, and diversification. Patience is a virtue. I always welcome your calls.

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