“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week is WDIY’s annual Fall Membership Drive, which includes a partnership with Valley National Financial Advisors. For every $100 raised during the Membership Drive, VNFA will provide Second Harvest Food Bank of the Lehigh Valley with the funds to deliver 21 meals to families and individuals in need in the Lehigh Valley.

Laurie will be on the air between breaks to address your general financial questions at 610-758-8810 or in advance via yourfinancialchoices.com/contactlaurie.

IN CASE YOU MISSED IT!
Listen to Laurie’s discussion last week with Dan Banks addressing Your Medicare Questions.

Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.

Heads Up!

Message from the CEO
Charles Schwab and Co. made history this week announcing that on October 7th, 2019 they will begin charging ZERO commissions on equity, ETF, and options trades. This means all our Schwab custodied investment clients’ cost of ownership for stock and ETFs portfolios will be lowered significantly. We expect all major custodians to follow suit in the weeks to come. At VNFA, we are constantly searching for ways to improve the client experience. We are proud that our business partners led the way and we look forward to many new innovations that we can pass on to you, our trusted clients.

Quarterly Commentary – Q3 2019

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Equities:
It was a bit of a seesaw quarter for equity investors, as the deepening trade conflict with China, concerns over global economic growth, and heightened geopolitical uncertainty all combined to stoke volatility in markets. And as if these issues weren’t enough for investors to grapple with, it was announced in late September that Democrats in the House of Representatives will move forward with impeachment proceedings against President Donald Trump. Yet despite all of the negative headlines, equities still managed to push modestly higher during the quarter, with the YTD return on the S&P 500 rising above 20%. International markets were unable to match the returns in U.S. equities however, with most foreign stock markets sliding lower during the quarter.

Bonds:
Bond markets continued to rally as interest rates moved lower throughout the third quarter. Longer-term interest rates tend to be closely aligned to investors’ collective expectations of future growth and inflation, and both have failed to materialize to the extent needed to sustain higher interest rates. From a growth perspective, the collective global economy has continued to show signs of weakening, and it is possible that some countries in Europe (such as Germany and Italy) may soon find themselves in recession. Inflationary pressures have ticked up recently as a result of the tight U.S. labor market and U.S. tariffs but could also be tamed if the U.S. and China are able to arrive at some kind of trade resolution, which remains our base-case scenario.

Furthermore, trillions of dollars’ worth of foreign bonds now trade with negative yields, a concept that is difficult for even many financial experts to truly come to terms with. Regardless of the reasons behind this phenomenon or even its long-term impacts on borrowers and lenders, it has undoubtedly created a powerful surge in demand for U.S. bonds, which remain one of the best options for yield-starved global investors. With few other places for bond investors to go, the prices on U.S. bonds have continued to be bid upward, pushing yields even lower.

Amazingly, it wasn’t very long ago that some bond market experts were questioning whether the Fed’s balance sheet runoff would lead to a surge in supply that might cause yields to spike meaningfully higher! In our view, the rapid transition from investors fearing rates might surge too quickly to those same investors struggling to find healthy yields at all is a testament to the unpredictability of markets and an argument for maintaining a balanced approach to portfolio management.

Outlook:
The third quarter was filled with uncertainty, much of which will not be resolved for some time. But one thing that was made abundantly clear as the quarter progressed was that in the eyes of the Federal Reserve, sustaining the expansion remains of high importance. In his September press conference, Jerome Powell stopped short of stating that the two recent rate cuts were part of a broader easing cycle, but it is becoming increasingly obvious that the market expects the Fed to keep its foot on the gas with respect to monetary easing. We believe however, that investors should pay more attention to economic fundamentals than to the Federal Reserve, as eventually, the Fed’s influence will wane and all that will be left to drive markets will be traditional factors such as economic growth and earnings. The evidence is mounting that the fundamentals are starting to flash warning signs for investors, but as has been the case throughout much of the past two years, the wild card remains trade. If the U.S. and China can reach a trade agreement, there could be room for measurements like manufacturing activity to rebound and for the expansion to be sustained even longer. In any case, with the strong returns achieved by both stocks and bonds throughout the first three quarters of the year, it is likely an excellent time for investors to rebalance their portfolios back towards long-term targets.

VIDEO: Q3 2019 Market Commentary
Connor Darrell CFA, Head of Investments, shares Valley National Financial Advisors’ summary of the third quarter and its impact on investors and portfolio recommendations. WATCH NOW

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week, Laurie and her guest Dan Banks from Silver Crest Insurance will discuss: “Your Medicare Questions.”

Laurie and Dan will take your questions either live on the air at 610-758-8810 or in advance via yourfinancialchoices.com/contactlaurie.

Recordings of past shows are available to listen or download at both yourfinancialchoices.com and wdiy.org.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equities slid lower last week as investors grappled with continued trade and geopolitical uncertainty, including the announcement by House Speaker Nancy Pelosi of an official impeachment inquiry. Also noteworthy was that shares of fitness equipment manufacturer Peloton fell dramatically on their first day of trading, the latest in a flurry of disappointing initial public offerings (IPOs) this year. Peloton’s disappointing trading debut was further evidence of waning enthusiasm for so called “unicorns” – private companies with valuations in excess of $1 billion, many of which are still relatively immature and not yet profitable.

Despite the ongoing political and trade sagas, the most impactful driving force in markets during recent months has been central bank activity. Both the ECB and the Federal Reserve cut their policy targets during September, and several other banks issued forward guidance that suggested an easing in monetary policy was on the table. Bond yields have moved lower as a result of the shifting tone and continued evidence of softening in the global economy (particularly in manufacturing) and continued that trend last week. In aggregate, the bond market generated modest returns as rates shifted lower.

Politics in both China and the U.S. Creating More Uncertainty
According to comments made by Treasury Secretary Steve Mnuchin during the week, trade talks with China are expected to resume in early October. The two sides will sit down to try and make progress on a trade agreement even as both Presidents face mounting political pressure at home.

For President Trump, the impeachment inquiry will undoubtedly put additional pressure on his relationships with senior advisors and could add an additional layer of complexity to future budget negotiations; in addition to the obvious potential for impacts on his political capital. Ultimately however, with the Republicans still holding a majority in the Senate and a two-thirds vote required to remove the president from office, a transition of power looks highly unlikely. But if the inquiry extends beyond what many seem to believe, the political pressure created by the inquiry might encourage the White House to reach a trade deal sooner rather than later.

For President Xi, the ongoing protests and unrest in Hong Kong represent a difficult situation as well. If Xi is forced to give in to any of Hong Kong’s demands, it could create a perception of weakness and put additional pressure on him to be particularly steadfast in his negotiations with the United States in an attempt to preserve his public image in China. This would likely make a trade deal more difficult to reach.

Ultimately, we continue to advise clients against implementing wholesale portfolio changes in the wake of geopolitical news. While uncertainty often leads to volatility, long-term market performance is driven primarily by economics rather than politics.

The Numbers & “Heat Map”

THE NUMBERS
Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

U.S. ECONOMIC HEAT MAP
The health of the U.S. economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

CONSUMER SPENDING

A

Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and recent GDP data provided further evidence of healthy consumer spending.

FED POLICIES

A-

Our Fed Policies grade has been increased to A- after the Federal Reserve cut its interest rate target by 25 bps following its most recent meeting. This marks the second time the Fed has cut interest rates in the past few months, but Chairman Jerome Powell hinted that he does not expect “a more extensive series of rate cuts” moving forward.

BUSINESS PROFITABILITY

B-

With most S&P 500 companies having reported Q2 earnings, the EPS growth rate for the second quarter is close to zero. Despite the weak growth rate, almost 75% of companies have beaten consensus estimates this quarter.

EMPLOYMENT

A

The US economy added 130,000 new jobs in August, below the consensus expectations of analysts. However, despite the lower than expected job creation, there was evidence of an acceleration of wage growth. The labor market continues to look quite healthy.

INFLATION

A

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. Recent inflationary data has increased slightly, but inflation remains benign at this time, which bodes well for the extension of the economic cycle.

OTHER CONCERNS

INTERNATIONAL RISKS

7

Following a re-escalation of the US/China trade dispute, we have raised our “international risks” metric back to a 7. Other key areas of focus for markets include the ongoing Brexit negotiations, rising economic nationalism around the globe, and escalating tensions in the Middle East.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.