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August 2019 Newsletter

Corporate earnings’ reports for the 2nd quarter of 2019 have been “good enough.” General expectations were calling for a 3% contraction in overall earnings this quarter, and it seems thus far that most companies have actually exceeded these weaker forecasts. In typical Wall Street fashion, estimates get lowered heading into the reports, so they end up usually looking a little better than expected. And at this point, the outlook from Corporate America for the rest of 2019 points to an economy that will continue to grow slowly.

Of course, as important earnings are as the “lifeblood” of the market, it remains obvious that the markets are fixated on the Fed and the direction of interest rates. Already the Fed has announced that it will stop quantitative tightening—two months ahead of schedule. And coupled with the recent rate cut on Wednesday, the Fed has made it clear that low rates are a priority. While the Fed lowered rates by .25%, Chairman Powell did NOT give the markets enough dovish guidance, and as such, with no assurance that future rate cuts were certain, the markets tumbled. The market’s apparent strong desire for low rates cannot be overstated. Markets are craving lower and lower rates and when they don’t get their way, they throw tantrums.

Making its first rate cut in over a decade, the Fed is signaling that it wants to be proactive in combating an economic slowdown. And between weaker GDP growth and a decline in business investment (…the worst in 3 ½ years), as well as the domestic headwinds from the current trade policies, there are certainly issues that may reflect potential problems which indicate to the Fed that a “pre-emptive cut” is warranted.

However, there are others who oppose the Fed’s actions and would argue that a rate cut was unnecessary at this point. Unemployment is still near an all-time low and the consumer is quite strong. Again, yes, manufacturing is weak, but this may be more attributable to the trade war, which could get resolved at any moment. But consumer spending—representing 2/3 of U.S. GDP-- gained nearly 4.5% from last quarter which was much stronger than the first quarter.

The bottom line is that corporate earnings look reasonable enough to support stock prices, but the markets continued addiction to lower and lower interest rates is not healthy.

How to Fortify a Retirement Portfolio

In a recent financial article, the author began by outlining a number of very important facts which investors, especially newly retired ones, need to consider when creating a portfolio that will endure through their retirement years. Here are the three realities:
  1. Rising life expectancy;
  2. Historically low bond yields;
  3. US Stock Market at historical highs.
The general theme of the article was to address these issues, reflecting the need for retirees to create retirement portfolios that generate enough income to keep up with inflation over the years, but also which will allow the assets to grow over time---and ideally with less volatility.  And as a last characteristic, the portfolio should allow the owner to enjoy life without basing every monetary decision on how the market is performing at any given time.

So what did the author determine as a solution? Dividend stock investing—a topic that we, at NCM, continue to write on regularly.

Investing in dividend-paying stocks may allow for a steady income stream that increases purchasing power. In fact, since 1960, while inflation averaged around 3%, the dividend paid by the S&P 500 grew at an annualized rate of nearly 6%--almost double inflation. This includes all market conditions during that time.

Further, dividend stocks can often be much less volatile than other equities. Generally, these dividend paying companies are more mature, and thus, their earnings are also much more predictable. Lastly and somewhat surprisingly, it has also been shown that dividend paying stocks actually outperform non-payers over time. In addition to the lower volatility, dividend paying companies generally tend to grow over time, and investors who are owners of these companies, share in this enterprise growth.

To summarize, dividend paying stocks offer:

-a very competitive current income stream;
-the likelihood of this income stream RISING over time (a VERY UNDERAPPRECIATED benefit);
-the possibility of the portfolio principal to grow over time;
-a potentially less volatile portfolio;
-low costs;
-tax efficiency.


Few other investment products can do all of these things for a portfolio.

Why Diversify?

As human beings we all suffer from what’s called “Recency Bias.” Recency bias is the phenomenon of a person most easily remembering something that has happened recently, compared to remembering something that may have occurred a while back.

Take for example today’s investment environment. The S&P 500 has been the dominant performer this decade, almost blowing away any other asset class in terms of total return performance. This of course is leading investors to overweight their portfolios to S&P 500-type funds as too many investors buy what has recently done the best. So I decided to look back a little further into the last decade and compare asset class returns.

Here’s what the decade of 2000-2009 looked like in terms of various asset class returns:
  • US Large Growth= -33% (negative!)
  • S&P500= - 9% (negative!)
  • US large value= +53%
  • US small value= +139%
  • MSCI World ex-US= +17%
  • International value= +90%
  • International small value= +190%
Almost the exact opposite of this decade! We diversify because we do not know--although, many claim to (ps: they don’t!)--which asset class will be the best performer over the next 10 years. Imagine the trouble an investor who retired in the early 2000’s would have if they had too heavy of a weighting in large growth stocks and S&P 500 funds?

All the best,