FINANCIAL MARKET UPDATE 1.21.2020

STORY OF THE WEEK

CASH CAN BE RISKY

By all accounts, 2019 was an excellent year for investors. Unless you hid your cash in your mattress, you likely earned a positive return on investment. Even if you hid your cash, you still didn’t lose money!  

2019 Returns by Asset Class

Source: Morningstar direct. Stocks were represented by the Russell 3000, bonds by the Bloomberg Barclays Aggregate Bond Index, Money markets by the Morningstar Taxable Money Market Fund Category, mattress was a Sleep Number 360® Special Edition Smart Bed.  

This snapshot of the market misses a crucial point, however, as it ignores the impact of inflation. People invest money today, so they can A) increase the quantity of goods and services that can be purchased in the future, and B) offset the impact of price increases over time (inflation). If the rate of inflation exceeds the return on an asset, the result is a loss of purchasing power. What ultimately matters for investors, is what happens to the purchasing power of their assets. The chart below illustrates the asset class returns after adjusting for inflation.

 

2019 Returns by Asset Class (Inflation-Adjusted)

Source: Morningstar direct. Stocks were represented by the Russell 3000, bonds by the Bloomberg Barclays Aggregate Bond Index, Money markets by the Morningstar Taxable Money Market Fund Category, mattress was a Sleep Number 360® Special Edition Smart Bed, inflation was the Consumer Price Index for All Urban Consumers (CPI-U)   

While the inflation adjusted-return, also referred to as the “real” return, remained positive for stocks and bonds, money market funds (invested cash) and your mattress (idle cash) lost value in terms of actual purchasing power. I would include traditional checking, savings, and brokerage sweep accounts as idle cash. Their returns were closer to what you would earn keeping money in your mattress versus a money market fund (or similarly high yielding account). The Consumer Price Index (CPI), a popular measure of inflation, increased by 2.3% in the 12 months ending last December, and has been trending higher. Meanwhile, the Federal Reserve lowered interest rates three times last year, which lowered the prospective return on invested cash. Even longer term bonds carry yields below the current level of inflation (see the Yield Curve Comparison chart in the Markets at a Glance section). The bottom line is even the most conservative investors can benefit from owning at least a little bit of stocks in their portfolio, given the risk imposed by inflation on future purchasing power.

WEEK IN REVIEW

  • Last week was positive for markets with most major asset classes gaining, and major U.S. equity indices reaching all-time highs. The S&P 500 has closed at a new high in six of the twelve trading sessions thus far in 2020.
  • The largest news from last week related to the signing of the trade deal between the U.S. and China. The deal is more like a ceasefire, as it does not address some of the trickiest issues on the table. The market response to the signing was muted, as most of the gains came on the announcement that the two sides were close to a deal.
  • As we move into the new week, fears have surfaced related to a spreading virus in China (reminiscent of SARS in 2002) that could impact travel and tourism heading into the Lunar New Year (Asia’s busiest travel period of the year). Additionally, Moody’s Investors Service downgraded Hong Kong’s credit rating in the wake of ongoing social unrest in the city. On Friday we will get a flash (early) look at activity in the manufacturing and services sectors when data provider Markit publishes their Purchasing Manager Indices (PMI).

HOT READS

Markets

  • Is This As Good As It Gets For the Stock Market? (Irrelevant Investor)
  • China Trade Deal Looks Like a ‘Modest Positive.’ But Large Uncertainties Remain (Barron’s)

Investing

  • You Bet! (Howard Marks) Similarities between investing and games of chance (gambling)
  • Apple and Microsoft Are Dazzling Investors. That Won’t Last (Zweig)
  • Reports of Value’s Death May Be Greatly Exaggerated (Research Affiliates)
  • CASPERhaps (Scott Galloway) Prof Galloway doubts Casper can IPO

Other

  • Good Science, Bad Science, Pseudoscience: How to Tell the Difference (Farnam Street)
  • The Secretive Company That Might End Privacy as We know It (NYT)
  • Visualizing the Biggest Risks to the Global Economy in 2020 (Visual Capitalist)

LFS BLOG

  • Are We Headed for a Recession? (Lutz.us)
  • Is Value Investing Dead? (Lutz.us)
  • Why Investors Should Own International Stocks (Lutz.us)
  • 3 Things All Investors Should Know (Lutz.us)

ECONOMIC CALENDAR

Economic Calendar

Source: MarketWatch

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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