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Third Quarter Newsletter

Responsible Guidance:  Third Quarter 2019 Newsletter, October 2019

Control the Controllable

You may not know this, but it’s been over 11 years since our last recession.  Though many economic numbers still signal potential for growth (admittedly, slowing growth), media noise is growing about a potential economic slowdown or recession.  The driver for the noise is due to one main indicator that has flashed recession concerns during the quarter, an inverted yield curve (see our Bonds section for more detail).  At Baron, we know we cannot control if or when recessions occur.  But we do know that we can control the controllable.  Below are some items we will be working on for you, as well as some things you should consider as we move into the final quarter of the year. 

  Baron Actionable Items for the upcoming quarter:

  • Review clients’ plans and probabilities for achieving their specifically defined financial goals
  • Rebalance investment portfolios where needed
  • Review realized capital gains to determine if there are opportunities to take losses
  • Offer to work and plan with clients’ tax professionals
  • Review investment strategies, including asset allocation, as well as individual asset choices for each defined asset class
  • Offer free Medicare consultations to clients with a Medicare expert
  • Work with clients to help meet Required Minimum Distributions (RMDs) for their retirement accounts

Items for you to consider addressing before year-end (we are happy to help with any of these):

  • Schedule an in-person or telephone/video conference review with your Baron Team
  • Begin gathering spending information for the year to determine any deviations from your plan
  • Reach out to your accountant to see if there are any year-end actions that might help with taxes (Baron regularly reviews capital gains and tax-loss opportunities for accounts that we manage).  We are happy to work with your tax professional.
  • Review any health/medical spending accounts to determine if you need to spend the money in the current year.  Not all accounts are the same.
  • If you are turning 65 or older, work with our Medicare consultant to understand your best options for Medicare
  • If you are 70 ½ or older, know your Required Minimum Distribution (RMD) requirements and what actions are needed
  • Are you planning a long vacation, or do you spend the winter at a second home?  Review your homeowner’s insurance policies to understand how your coverage works when you are away.

These are just some of the items to consider.  Please reach out to us for help on any of these items or anything else that may be impacting you financially. 

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. 

There are popular benchmark indexes that provide perspectives about performance of global investments.  For equities, we monitor the MSCI ACWI All Cap Index.  This index is designed to represent equity investments across 23 developed and 24 emerging markets.  In the third quarter, the index was down 0.20% bringing year-to-date (YTD) performance to 15.80%.  Areas of weakness during the quarter were in domestic small-cap stocks and international developed and emerging market stocks.  For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies and was up 0.85% in the third quarter and 6.27% YTD.

U.S. Economy

Though the global stock index we follow was down for the quarter, domestic economic expansion continues.  As economic data has remained positive, concerns about impacts from trade policies, slowing global growth, interest rate levels, including a yield curve that temporarily inverted, and a challenging environment for domestic manufacturing weigh on investors’ minds.

The Bureau of Economic Analysis (BEA) announced in its third estimate for the second quarter of 2019 that real Gross Domestic Product (GDP) increased 2.0%.  This was in line with the second estimate received in August.  Though the economy is still growing, the data represents a slowdown from the 3.1% reading for the first quarter.

GDP is a measurement of what has already happened.  There are, however, statistical measures that give insight into the future.  One of those measures is The Conference Board Leading Economic Index® (LEI) for the U.S. The index is an analytical tool that helps signal peaks and troughs in the business cycle.  The August LEI, released on September 19th, was slightly higher at 112.1 (2016 = 100), compared to our second quarter reading from May, but was unchanged from the most recent August data. 

“The US LEI remained unchanged in August, following a large increase in July. Housing permits and the Leading Credit Index offset the weakness in the index from the manufacturing sector and the interest rate spread,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The recent trends in the LEI are consistent with a slow but still expanding economy, which has been primarily driven by strong consumer spending and robust job growth.”  

We first shared the chart below in our 2018 fourth-quarter letter and believe it is important to continue to track as a potential recession indicator.  The blue line represents the LEI, dating back to the year 2000.  Since then, we have had two official recessions, which are identified by the shaded gray areas.  A recession is typically defined as two consecutive quarters of negative economic growth.  Using the last two recessions as a gauge, we believe that the chart suggests that there was significant erosion in the LEI (blue line moved lower) prior to the economy realizing negative growth.  Though this is only one tool, we would conclude that economic signals, such as the LEI, suggest that opportunities for economic growth remain and that a recession in the near-term is less likely.

The full release from the Conference Board can be found at:

https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20SEPTEMBER%202019.pdf

According to the Bureau of Labor Statistics (BLS), the U.S. added 136,000 jobs for the month of September and the unemployment rate decreased to 3.5%.  Notable gains were in health care and professional and business services.  Positive revisions to previously released data provided confidence for investors in both the economy and the consumer when the data was released on October 4th.

The Conference Board Consumer Confidence Index® stands at 125.1(1985 = 100) in September.  The number is higher than our reported number in our second quarter newsletter but is a reduction from more recent monthly readings. 

“Consumer confidence declined in September, following a moderate decrease in August,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened. The escalation in trade and tariff tensions in late August appears to have rattled consumers. However, this pattern of uncertainty and volatility has persisted for much of the year and it appears confidence is plateauing. While confidence could continue hovering around current levels for months to come, at some point this continued uncertainty will begin to diminish consumers’ confidence in the expansion.”

U.S. Stocks

The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 1.70% in the third quarter, and 20.55% YTD.  Corporate profitability, domestic economic data and the Federal Reserve’s dovish tone (accepting or promoting lower interest rates) helped domestic large-cap stocks continue on a positive track. 

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was down 1.07% in the third quarter, bringing YTD performance to 12.80%.  Non-developed, or emerging countries (such as China, India, Brazil or Russia) measured by the MSCI EM index, was down 4.25% for the third quarter, but still remains up 5.89% YTD. 

Since the end of 2017, we have heard that international-equity investments appear cheap, on a relative basis, to U.S.-based investments.  Looking forward, there are some discussions occurring that suggest growth may be turning around outside the U.S. Concerns outweighed optimism during the third quarter.  However, if a recovery starts to mount, you would expect to see international-equity investments outperform on a relative basis.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, produced a positive 2.27% return in the third quarter driving YTD performance to 8.52%.

The 10-year U.S. Treasury bond yield was 1.68% at the end of the third quarter, which is lower in yield than where it began the year at 2.69%. 

The Federal Reserve (Fed) continued to cut rates, and investors continued to buy longer-dated Treasury investments driving longer-term rates lower. Speculation about why investors bought longer-term bonds ranged from buying U.S. debt that looks attractive, relative to yields offered outside the U.S., to concerns over future economic growth and future interest rates.  

If you plot interest rates versus the time-to-maturity to earn those rates, you have created what we call a yield curve.  In previous newsletters we have written, in great detail, about the changing shape of the yield curve and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods).  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government Bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep (long-term rates higher than short-term rates) and wide spread, indicates possible future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

We should be specific in noting that we have been using the 2-year and 10-year rates as the main data points to determine the shape of the curve.  At the end of the third quarter, most U.S. bond/bill rates with maturities of 1-year or less were greater than the 2-year rate.  Though rates shorter than the 2-year are higher, we will stick with our data points for our discussion.  We recognize that there may be some news/research outside of this newsletter that sounds different because some focus on rates for 1-year or less.  During the third quarter there were times when the 10-year rate was actually lower than the 2-year rate and the yield curve was technically inverted.  This caused serious discussions about the possibility of a recession signal.  Though an inverted yield curve has historically been a strong recession indicator, the timing of the recession after an inversion occurs is not necessarily imminent. 

By the end of the quarter, the shape of the yield curve was fairly flat, on a relative basis, meaning long-term rates were slightly higher than short-term rates.  As noted, the 10-year bond finished at 1.68%, while the 2-year ended the first quarter at 1.63%, a difference of 5 basis points (a basis point represents 1/100 of 1%).  This suggests the bond market continues to be uncertain about the future of the economy.  The changing shape of the yield curve has really been occurring since at least 2014, when the spread between the 2-year and 10-year was over 220 basis points (bp). 

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index continues to be the strongest YTD performing asset class that we monitor, producing a positive 28.49% return.  For the third quarter, the index was up 7.73%.  The quarterly gain was also the largest of any asset class that we follow.

According to Freddie Mac (FM), the average 30-year residential home mortgage rate moved even lower to 3.64%, near the end of the third quarter.  The rate was 4.51% (close to a seven-year high) near the start of the year.  The lower rates may have a positive impact on the housing market.  For those who have a current mortgage and have not refinanced in some time, it may be worth looking at potential options.

Natural Resources

The Bloomberg Commodity Index (BCOM) declined in the third quarter, losing 1.84% and dropping YTD performance to 3.13%.  Tame inflation data has been tied to the less than stellar performance of this asset class.

 Natural Resources serve as an expected hedge against inflation and offers statistical benefits to portfolios.  We continue to monitor our investment choices in this asset class and look to make improvements when possible, as we do for all of our asset classes.


Baron Client Strategies

As we work towards completing our year-end planning items identified at the beginning of our letter, know that our ultimate goal is to help you plan for and meet your financial goals and objectives.  Regularly handling the controllable items will hopefully keep you on track financially and help avoid any major mistakes or the need for major adjustments later on. 

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and have regular feedback loops to update information.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course as necessary. For more specifics, check out our “What You Can Expect” document by clicking the button below.

What You Can Expect


Your Personal Economysm

You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives.  We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.”  So, we have decided to add this new section as a reminder of all of our services and to share ways in which we have helped clients outside of investing.  

Are you approaching or already Medicare age?  For those 65 or older, registering for Medicare can be confusing and stressful.  Don't stress or attempt to figure it out yourself.  Lean on Baron as a resource to help with the decision-making.  We have our clients work with a Medicare expert to make sure both coverage and costs are optimized.  Remember, the program is not a set it and forget it plan. Reviewing annually is very important, so make sure you are using your Baron resources to the fullest.  The period for Medicare's Annual Enrollment for 2020 coverage runs from October 15, 2019 through December 7, 2019.



Concluding Comments

Whether you are planning for short-term events like calendar year-end, or longer-term financial goals like retirement, remember to focus on what you can control. 

One important and exciting new addition to our website is the online client-portal tab, which will allow you access to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides.

Would you like to enroll in paperless Baron statements?  Paperless statements are currently available and accessible through our online client portal in the “Documents” section.  You must be enrolled in the client portal in order to view your paperless statements. You will receive an email notification each quarter your statements are posted.  Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

We would like to thank all of you who attended our Wine & Wealth presentation on Medicare, Social Security and how the media influences your ideas about investing. We hope you found it informative.  If you would like to view the taped presentation, it is available in the October 8, 2019 blog post on our website.  

Look for an email or hard copy invitation soon to our holiday receptions in Hawthorne, New Jersey on Dec. 5th, and in Sarasota, Florida on Dec. 12th.

For more educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.  They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others. 

Tony’s name appears in the November issue of Sarasota Magazine, as a 2019 Five Star Wealth Manager award recipient in Sarasota.  The 2020 New Jersey Five Star award recipients will appear in January’s New Jersey Monthly magazine.

As we approach Thanksgiving and the season for giving, we are reminded that we are grateful for your continued support and we endeavor to pay it forward.  We are proud of our philanthropic efforts, which include pro-bono work, as well as monetary donations to The Fair Lawn Food Pantry, the All Faiths Food Bank in Sarasota, the Adopt-A-Soldier Platoon, Spectrum for Living (serving adults with developmental disabilities) and the SCARC Foundation Capital Campaign (serving people with developmental disabilities). In addition, we are proud to continue our nine-year tradition of providing a Baron Financial Group Scholarship to two deserving Fair Lawn High School graduates (1 female and 1 male), who plan to further their business education.  We are proud to help!

In closing, please join us in welcoming the newest addition/intern to the Scheibner/Baron family – Miss Joanna Rose Scheibner was born on September 4, 2019.  We are thrilled to report that everyone is happy and thriving!

Warmest Regards,

 Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 8, 2019 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.