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Short-Term Uncertainty, Long-Term Gains

The roller-coaster politics of this last week have left many investors uncertain about how politics affect long-term investment decisions. President Trump famously tweeted that the U.S. stock market will experience a severe decline if the impeachment process goes much further. However, as we'll see, the truth tells a different story.

In addition to the impeachment hearings, the market is trying to read the tea leaves about the U.S. trade war with China, a possible troop withdrawal from Syria, and a chaotic Brexit in the United Kingdom.

What makes the prediction business more complicated is that the facts are contradictory. At the same time, we are experiencing short-term insecurity, the long-term returns have been reassuringly resilient. We have the strongest labor market in several decades, with the pace of layoffs and the unemployment rate near a 50-year low.1 Consumer spending has been extremely stable, rising an estimated 4.6% year over year.  Adjusted pretax corporate profits are up 3.8% in the second quarter (the most recent period for which we have statistics).  Many economists predict that the economy will continue growing to the end of the year at least.

The third quarter saw gains in the broadest market indices.  The Wilshire 5000 Total Market Index—the most extensive measure of U.S. stocks—rose 1.23% in the most recent three months, and now stands at an 20.11% gain for the year.2  The comparable Russell 3000 index is up 20.09% so far this year.3 

Large cap investments also showed positive returns. The Wilshire U.S. Large Cap index gained 1.53% in the third quarter, posting a positive 20.56% return so far in 2019.  The Russell 1000 large-cap index has gained 20.53% so far this year, while the popular S&P 500 index of large company stocks was up 1.19% in the third quarter, up 18.74% for the year.4

Real estate investments have been looking particularly robust this year. The Wilshire U.S. REIT index, posted a 7.88% gain during the year’s third quarter, and now stands at an impressive 27.21% gain for the first nine months of the year. 

To assess the long-term impact of impeachment, we need to look at the two impeachment processes that we have seen in modern times -- Bill Clinton and Richard Nixon. The two impeachments produced very different market outcomes.

President Clinton's impeachment started in December 1998, and ended in acquittal by the Senate in February 1999. The Standard & Poor’s index of 500 U.S. large companies dropped 19.4% from July 17 through September 9 in anticipation of the release of the Starr report, which detailed the case against the President. But then, during the actual trial, there was a significant rally, and the market was back on the plus side by November 28, 1998. From the date the House started impeachment proceedings to the final acquittal, the S&P 500 posted a remarkable 28% gain.

Keep in mind that during Clinton's impeachments, the U.S. economy was booming and the market was flying high amid the tech boom, the advent of the Internet and a balanced federal budget.5

President Nixon's impeachment took the markets in the opposite direction.  From the date that the newspapers reported the Watergate break-in on June 17, 1972 until the President’s resignation on August 8, 1974, the S&P 500 tumbled 23.7%. 6

Other reasons for this downturn could be that during the 1973-4 period, the global monetary system was going through a wrenching correction because the U.S. left the gold standard. In addition, oil prices were spiking, leading to stagflation. 

President Trump argues that the stock market is all about him. The reality is more likely that economic forces have much more influence on stock movements than the winds of politics.

Although the future of the market is uncertain at the moment, there is little reason to panic, especially if you are a long-term investor.  History has shown that bull markets tend to be longer and steeper than bear markets. What does this mean when you want to accomplish long-term goals, like retirement? Holding on tight in choppy times tends to be a winning strategy.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

1 https://www.marketwatch.com/story/slowing-but-still-strong-us-jobs-market-keeps-economy-going-in-turbulent-times-2019-09-28?siteid=yhoof2&yptr=yahoo

2 https://www.wilshire.com/indexcalculator/index.html

3 http://www.ftse.com/products/indices/russell-us 

4 http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

5 https://www.thestreet.com/story/14140200/1/when-clinton-was-impeached-markets-gained-with-trump-it-might-be-different.html

6 https://www.marketwatch.com/story/market-sentiment-during-watergate-shows-how-stocks-might-react-to-trump-2017-05-19

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Negative Interest Rates?

A year ago, market analysts predicted that bond yields had nowhere to go but up. Lo and behold, the yield on the 10-year Treasury note is hovering around 1.7%; it was more than 3% at this time last year.[i] 

In the United States, the Federal Reserve is in charge of setting monetary policy, or the management of interest rates and total supply of money in circulation.  Fiscal policy, on the other hand, involves the taxing and spending actions by the government and is set by the national government.  While each are separate independent bodies, monetary and fiscal policy share the common goal to promote economic growth and curb inflation.[ii]  These days, fiscal policy is also putting pressure on monetary policy in ways inconceivable before. In a recent tweet, President Trump called on the Fed to cut interest rates to “ZERO, or less.” [iii]

In August of this year, the Federal Reserve, led by Fed Chair Jerome “Jay” Powell, cut interest rates 0.25%.  This shocked the country given the Fed had done just the opposite and raised interest rates nine times between 2015 and 2018 in an effort to curb future inflation. Then last week, the Fed cut interest rates by another 0.25%.[iv] The interest rate cut worries many investors because it reminds them of the last time the Federal Reserve cut interest rates in 2008. 

The Federal Open Market Committee (FOMC), the monetary policy-making division of the Federal Reserve, meets eight times a year to set the Fed Funds Rate. The Fed Funds Rate is the interest rate at which banks will loan money to each other overnight to meet their legal reserve (cash on hand) requirements.  When the Fed increases the Fed Funds Rate, the cost for borrowing capital increases for banks.  Therefore, banks charge more to corporations and individual consumers to borrow money – tightening monetary supply.  On the other hand, when the Fed Funds Rate is lowered, banks can borrow money at a lower cost and therefore lend to consumers at a lower cost – easing monetary supply. Lowering interest rates has a ripple effect on the economy and generally speaking, the stock market does well when interest rates are cut.

During the Great Recession of 2009, the Fed cut interest rates in an effort to stimulate economic growth and consumer borrowing/spending.  This kept financial markets afloat and gave middle class America access to much needed cash.  Now, the Fed is cutting interest rates despite steady growth, leading many to wonder why.  

President Donald Trump recently advocated that negative interest rates would further boost the economy. In this odd circumstance, consumers would actually be penalized for keeping money in the bank.  For example, rather than earning 1% for keeping your money in a 1-year CD, in a negative interest rate environment, you would pay the bank 1% as a service fee for the safe-keeping of your money during the year.  In such a scenario, big banks and corporations might be encouraged to spend or invest money rather than leaving it on the sidelines in caution.

The European Central Bank (ECB) has had negative interest rates for five years due to a struggling economy. Shortly after the ECB, the Bank of Japan adopted negative interest rates in early 2016.  The state banks of Sweden, Switzerland and Denmark also adopted negative interest rates.[v]  You might think, “No one would be absurd enough to pay a bank to hold their money!” but at the peak, approximately $12.2 trillion was held at negative interest rates.

Historically, negative interest rates have only been implemented on large corporations to punish them for parking money in cash and encourage spending or lending of money that could stimulate the economy. Traditional bank depositors were not subject to the same negative-interest fee on daily checking accounts, otherwise they might resort to keeping cash under their mattress to generate a higher 0% investment return on their money!

No one expects interest rates to go negative soon, but the door to such ideas has been opened.  The Federal Open Market Committee meets again at the end of October and we’ll see what lies ahead.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Bonds Have Their Day In The Sun

As a reward for not panicking during the Great Recession in 2008 and 2009, investors have been blessed by one of the longest market rallies in history. It began in March of 2009 and has continued until now.

It was not a steady climb upward. The market was much more volatile than many people were used to, with lots of dips along the way. However, those investors who followed a strategy of broad, global diversification benefited from reduced volatility and enhanced downside protection. This is because their portfolio was balanced, and spread the risk as broadly as possible, just the opposite of putting all your eggs in one basket. A properly-diversified portfolio tends to include U.S. large, medium and small companies, international small, medium and large companies, companies from emerging markets, real estate, commodities and bonds.

Bonds have an important place in the strategy because they provide stability. Stocks may jump up and down and all over the place, and over several years they might even jump 100% in value.  Meanwhile, the bonds in the portfolio crank out predictable coupon yields quarter after quarter after quarter. It's as exciting as watching grass grow.

For some of our clients, the relatively sluggish performance of their bond allocation was frustrating. "Why do we even have bonds in the portfolio at all?" was a common refrain.

How things have changed. In the blink of an eye, the bond market has taken off. Year to date, while stocks were bouncing around at prices roughly where they were in early 2018, bond investors have reaped some significant capital gains. 

How significant?  Since the beginning of 2019, investors in the 30-year Treasury bond have seen gains (interest plus price appreciation) of 26.4%—which would be a great full year’s return for stocks.  Long-term bonds overall have generated a 23.5% return, as represented by the Bloomberg Barclay’s U.S. Aggregate Bond Index.  Investment grade corporates have returned a not-too-shabby 14.1%, while the 10-year Treasury note has gained 12.6%.1 Those investors who were griping earlier now understand that there are times when bonds can add more kick to their returns than they expected. Every asset class has its day in the sun -- you just don't know when.

The yield drop that caused these returns was a surprise for many market analysts. They had been predicting over roughly a decade that bond yields had nowhere to go but up. The market tends to teach gurus humiliation. The yield on the 10-year Treasury note is now just under 1.47%; it was more than 3% at the end of 2018. 

As you may know, bond values are bond yields move in opposite directions -- if the value of a bond falls, the dividend (or yield) that it pays out increases in percentage. So if yields are dropping, it indicates that investors are snapping up bonds and driving up prices.

How long will this continue?  It’s very hard to imagine that 10-year Treasuries would fall another 1.5%—to zero yield.  The smart money says that most of the gains have already been taken, and anybody looking for 20+ percent returns in long-term bonds going forward is just diving into the water after the tide has gone out.

There's an important lesson here. We know the market is unpredictable and confounds prognosticators. It doesn't usually pay to time the market, or tweak your asset allocation in anticipation of what you think the market is going to do.

If you want to benefit from a globally-diversified investment strategy, it takes some discipline, and sometimes gritting your teeth a little. But the satisfaction is great when a humble asset class that nobody paid attention to suddenly blossoms, and you already had it in your portfolio.

1 https://www.nytimes.com/2019/08/28/business/bond-market-trade-war.html

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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Politics & Your Portfolio

These days, the stock market can swing from positive to negative territory, sometimes moving 800 points, in just a few hours.  Due to the daily volatility, future market predictions run the spectrum from cautions of a looming recession to claims that we are witnessing the strongest market in history. It’s hard for anyone to make sense of the noise and separate fact from fiction.

The truth is that the Dow Jones Industrial, the most widely referenced measurement of the stock market, is up approximately 2,700 points or 12% year-to-date 2019.  While the Dow is down approximately 5% since the market high in July of this year, the stock market is still positive year-to-date, and still near all-time market highs. Much of this has to do with the fact that the economy is strong, despite the political uncertainty. In fact, second quarter earnings in 2019 on the Standard & Poor’s 500 Index stood at $42.13, even higher than the originally forecasted $40.70 for the quarter.[i]

However, the Trump Administration’s escalating trade war with China is continuing to throw the market for a curve ball. In early August, the President announced a new round of tariffs on China which sent the market into a tailspin. On Friday of last week, President Trump demanded U.S. corporations leave China and publicly called the Federal Reserve Chairman, Jerome Powell, an “enemy” for not lowering interest rates.  Both actions negatively affected the market.

It is common knowledge that the President considers the stock market his measure of success and is therefore upset when the market is down. So, after the market sell-off last week, the President claimed to have received “two very good calls” from China indicating a resolution from China could be on the horizon and his hardline tactics were yielding positive results.[ii]  However, less than 24 hours later, Chinese delegates publicly announced that no such calls had been made and “China didn’t change its position.” [iii]  It’s no wonder stocks, and investment portfolios, are getting whipsawed in the market.

Besides financial news that directly affect the market, reports of President Trump advocating for Russia at the G7 Summit and his tweets bashing Puerto Rico as they prepare for Hurricane Dorian make any possible logical conclusions about our political predicament impossible. Those with sound mind are trying to make sense of a very volatile and confusing landscape, but it’s getting harder each day.

It is quite possible that the U.S.-China Trade War will push the longest running bull market into an overdue correction.  If that’s the case, economists predict that a down market could stretch from a couple of quarters to a year or two. However, history has shown that a market exodus can present an opportune time to buy when stocks are on sale. Giving into emotions and locking in losses during a market downturn only hurts long-term investment performance. A better solution is weather out the storm or, if necessary, make a portfolio adjustment that will allow you to stay invested for the long haul and capture market recovery. Whatever direction the market takes in the weeks and months to come, we will certainly be entertained.   

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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How Safe Is Your Safe Deposit Box?

Wells Fargo has paid nearly $15 billion in penalties since 2000, for abuses ranging from creating fake client accounts, mortgage abuses, false claims, hidden fees, to making investment recommendations to clients that mainly benefited itself.1

Now it turns out that even the lowly safe deposit box in a Wells Fargo branch is not quite as safe as customers thought. A recent New York Times article2 told the story of Philip Poniz, an internationally known expert in the history and restoration of high-end timepieces. He stored his collection of 92 rare watches in his local Highland Park, N.J. Wells Fargo branch, secure in the knowledge that the treasures from his life's work were safe behind a foot-thick steel door, and protected by two keys -- the bank kept one, and he kept the other. He considered it his retirement fund.

Nevertheless, when Mr. Poniz opened the box years later, it was empty. "I thought my heart would fail," he said. After an investigation, he learned that another Wells Fargo customer had not been keeping up with payments, so employees drilled open the box, and seized the contents. However, they opened Mr. Poniz' box by mistake, sending the contents to a storage facility in North Carolina. After Mr. Poniz finally tracked down the items, many had vanished, a combined value of more than $10 million.

New Jersey law requires that when a bank empties a customer's safe deposit box, it must have an independent notary put the contents into a sealed package and sign it. Wells Fargo did not follow that law.

To his horror, Mr. Poniz found that Wells Fargo's safe deposit box contract limits the bank's liability to $500. He also learned that safe deposit boxes are not FDIC-insured. Furthermore, there are no federal regulators for safe deposit boxes under federal banking law. Instead of stepping forward and making Mr. Poniz whole, Wells Fargo has been fighting Mr. Poniz in court for years, prolonging the dispute.

The lesson to the 25 million customers who have safe deposit boxes, whether the bank is Wells Fargo or not, is to become aware of the rules regarding safe deposit boxes, and what you should keep, and not keep, in your safe deposit box3 --

CASH

Cash is not appropriate for a safe deposit box for several reasons:

* If you need the money in an emergency, but the bank is closed, you're out of luck.

* The cash is not earning interest, like it would in a savings account, or CD.

* Cash in a safe deposit box is not protected by FDIC.

* Many banks expressly forbid storing cash in a safe deposit box.

PASSPORT

Even if you travel infrequently, avoid the temptation to keep your passport in a safe deposit box. You may need to leave the country on short notice on an emergency trip (for example to respond to an illness or injury), but if the emergency comes up during non-banking hours, you'll be staying home.

ORIGINAL COPY OF YOUR WILL

It's best to keep copies of your will, trust, and other important documents in your safe deposit box, but not the originals. After your death, the bank will seal the safe deposit box until an executor can prove he or she has access to it. This could hold up the execution of your will, and the distribution of inheritances. Keep original documents with your attorney, or someplace where your executor can have quick and easy access.

DURABLE POWERS OF ATTORNEY

Similarly, if you become incapacitated, a family member or trusted friend may need to handle your legal and financial affairs. However, if the POA is locked away where no one can access it, their hands are tied. Keep the original POA with the originals of your will or trust, and provides copies to those who may need it one day.

UNINSURED JEWELRY AND COLLECTIBLES

Jewelry, coins and similar valuables should only be stored in a safe deposit box if they are properly insured. As Philip Poniz learned too late, Wells Fargo explicitly states that box contents are not insured, and advises box owners to "purchase an appropriate policy from the insurance company of your choice." Be sure to keep original receipts and written appraisals. Take photos too.

ILLEGAL OR DANGEROUS ITEMS

There are some things other than cash that cannot legally be stored in a safe deposit box. These include drugs (both legal and illicit), firearms, and explosives. Although banks make a point of not knowing what their customers have stored in their safe deposit boxes, if law enforcement suspects that you are storing prohibited items, or are hiding the proceeds of a crime, they can obtain a warrant to search your safe deposit box and seize the contents.

 

1 https://violationtracker.goodjobsfirst.org/parent/wells-fargo

2 www.nytimes.com/2019/07/19/business/safe-deposit-box-theft.html

3 www.kiplinger.com/slideshow/saving/T005-S001-things-you-ll-regret-keeping-in-a-safe-deposit-box/index.html

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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EDUCATIONAL WORKSHOPS

2019 SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 4, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*Not sponsored by the City of Gardena

 

HELP YOUR CHILDREN WITH FINANCES

Saturday, May 11, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.,

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 13, 2019

9:00 a.m. - 11:00 a.m.

Kondo Wealth Advisors Pasadena Office (tentative)

300 N. Lake Ave. Suite 920

Pasadena, CA  91101

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 20, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 7, 2019

9:00 a.m. - 11:00 a.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDs

Saturday, September 14, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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