KCM's Komments

SEPTEMBER 2018
MARKETS AND RESULTS—





The third quarter was another volatile ride. We endured peaks and troughs caused by market reaction to various political and economic events. An actual interest rate increase and trade related matters negatively affected markets. Yet economic strength supported domestic stocks which higher than their June 30 values. Even small cap stocks outpaced large cap stocks until late in the quarter when they, and midcaps, dropped. Large cap growth and technology shares did very well, each up over 9% for the quarter.

The fixed income markets (“bonds”) were again hurt by an interest rate increase and fear of more. Our 1st quarter addition of some floating rate debt and our continued holding of inflation protected debt as well as shorter average maturity levels helped increase portfolio income and preserved market value for the quarter.

Real estate reversed its prior quarter’s trend and moved down for the quarter ending basically flat. Extra Space Storage dropped as its revenues and net income fell.

Emerging markets’ stocks did a little better in 3rd quarter versus 2nd quarter. They endured 4 peaks and troughs. Trade concerns and some political issues in certain countries caused a quarter-end negative result. China was the big loser, down over 7.7% for the quarter. Yet Thailand was up over 14.5%.

Domestic value style stocks lagged core and growth styles for the quarter but finished the quarter in positive territory. Our continued holding of the IVE value core ETF and the FDL dividend leaders ETF helped as they both were up over 5%. Overall our value stock picking strategy finished the quarter over 6% and was ahead of our domestic all cap multi-style strategy which finished just under 6%.

Our income oriented portfolios continued to generate payouts as planned so clients kept getting the money they needed and expected. Our yield strategy continued to generate about a 7% income yield.

GOING FORWARD

We have been, and expect to remain, fully invested. We have little to no tactical cash cushion. We expect some more market ups and downs as the trade war concerns evolve and as interest rate increases occur. We think one more hike will occur this year but inflation has to pick up a lot more before we think interest rates will get back to the typical level seen over the past 50 years. Remember, over the long run, remaining fully invested gets the best returns, especially in taxable accounts even when we are not happy with the short term downward moves. In these times, taking a long view, betting on America’s strengths economically and that markets will be rational over the long term, preserves your chance of making money, especially in a taxable account where taxes highly impact wealth when gains are realized.


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