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Third Quarter 2017 Newsletter

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Global stock markets have continued their seemingly indefatigable upward trends during the third quarter, even showing strength during some historically negative US events.  For instance, Hurricane Irma ravaged many portions of Florida over a weekend.  The following Monday, US stock markets made new, all-time highs. Wow.  On Sunday October 1, a lone gunman in Las Vegas committed the largest mass shooting in our country’s history.  The next day, even with this atrocity, US stock markets made another new high.  Wow, again.   But those are not the “wows” we’re talking about in the title.  All great bull markets climb a wall of worry (WOW), or fear.  If there was no fear, all investors would be fully invested and there would be no one left to buy stocks.  The current bull market is no different than past ones, although it appears that the market’s chutzpah, its boldness and temerity, have been at all-time highs lately. 

Those aren’t the only WOWs that the stock market has had to deal with lately.  (Some of these were pointed out by Jared Dillan in a MarketWatch opinion article dated 9/22/17.) 


  • The leaders of two nuclear powers threatening and calling each other names, not unlike an elementary school playground.
  • A potentially overvalued US stock market that is being led by a small handful of FAANG stocks (Facebook, Amazon, Apple, Netflix and Google).  As of 8/23/17, those five stocks were up on average over 30%, all other stocks in the S&P 500 were up an average of 5.5%.  
  • An international bond market wherein much of the government and high grade debt has negative interest rates, and European and Emerging Market junk bonds are yielding just slightly above the 10 year US Treasury Bond.
  • An Administration and majority party that has had difficulty passing legislation upon which they based their party platform, highlighted by a Republican President who is often showing more animosity to the leaders of his own party than those of the opposition.

There are a bunch of other bricks building that wall of worry -- we’re sure you can think of others. Suffice it to say, there are plenty of worrisome subjects from which you can pick and choose.  But many of these topics really don’t have a direct influence on stock market performance, even though they may easily disturb both investors and the non-investing public.

This is a great background for the “perma-bears” to project their misgivings about the market’s ability to continue in the upwards direction, as well as predict just what, when and how the next bear crash will take place.  In an article written by Ben Carlson this summer, (A Wealth of Common Sense “Bulls, Bears and Charlatans” 6/12/17) a quote is given by William Bernstein: 

The article further discusses this topic by using Jim Rogers as an example.  Rogers worked with famed hedge fund manager George Soros in the 1970s, made a load of money, and retired in his 30’s to travel the world and write books.  Lucky guy.  This summer there was a headline exclaiming: “Legendary Investor Jim Rogers expects the worst crash of our lifetime!”  At first blush, that is somewhat terrifying.  A (somewhat) famous finance guy is expecting something really bad to happen.  Should we sell everything, or just jump off a cliff? 

Before getting too excited, there is a bit more to the story. It seems as though this is not the first time Rogers has opined on this subject.  The above referenced article listed the following times and subjects of Rogers warnings:

  • 2011 Jim Rogers:  100% Chance of Crisis, Worse Than 2008
  • 2012 Jim Rogers:  It’s Going To Get Really “Bad After The Next (2012) Election”
  • 2013 Jim Rogers Warns:  “You Better Run for the Hills!”
  • 2014 Jim Rogers:  “Sell Everything and Run For Your Lives”
  • 2015 Jim Rogers:  “We’re Overdue” for a Stock Market Crash
  • 2016 Jim Rogers:  DIRE WARNING: $68 TRILLION “BIBLICAL CRASH” Dead Ahead
  • 2017 Jim Rogers:  The Above Mentioned “Worst Crash of Our Lifetime”

With this additional history, Rogers’ recent warnings perhaps don’t sound as dire.  First, during the 7 years mentioned above, the S&P 500 has more than doubled.  Poor Jim presumably has been on the sidelines, cheering for a big drop.  If so, he’s been disappointed.  That certainly doesn’t mean that a drop won’t occur sometime.  In fact, a big drop is certain to occur SOMETIME!  Just like the world will come to an end…sometime.  But to live your life assuming that will take place this year or next is certainly not the way to handle this eventual risk.  These perma-bears and doom-and-gloomers take advantage of that W.O.W. (to sell books, speaking appearances or general fame and ego enhancement) and play on those fears.  The problem is that this distracts many investors from owning and benefitting from a properly managed portfolio.

Rather than worry when the next bear market will occur, investors should make sure they have a structured plan that will take the markets inevitable ups and downs as part of their long term investment program.  By owning a balanced portfolio and properly rebalancing, investors have been able to weather the most difficult crises and emerge better off a few years down the road.  See Exhibit 1 below:

The above chart shows five meaningful crises that have occurred over the last 30 years, and a 60/40 equity/income balanced portfolio’s performance over the ensuing 1, 3 and 5 year periods.  Note the dramatic increases in portfolio return over most 3 year periods and all 5 year periods following these tumultuous times.   We often discuss the positives of being a long term investor and not trying to time the market.  Studies have shown that when most investors flee the market during a crisis (usually after the market has already had a meaningful down move), it can take several years for them to invest back into the market.  It has historically been better to stay in the market and rebalance the portfolio when the equity percentage is reduced during a major correction.  That way, you are assured to be at the start of every new bull market, and have the newly increased equity position take full advantage of the entire new bull market cycle.

There is no reason to believe this current bull market is over, much to Jim Rogers’ dismay.  But it makes sense to review the plan for when Jim is finally correct on his market call.  Until that time, it makes no sense to worry.  It will only decrease the enjoyment of your life.  You should be spending your time looking for better, more positive “wow” moments in your life, and leave the worrying to those who have no plan in place to deal with market volatility.   

Our New Client Portal

Some of our clients may already have been notified about our new DHGWA Client Portal, which is now available to all clients.  The Portal is a new, more convenient way to access much of the information most important to you.  Future quarterly performance and investment reports will be accessed directly from this portal, allowing for more timely and secure access to this information, without the need to wait for mail to arrive.  Quarterly reports will be held in the portal indefinitely, assuring you will never misplace any information.  You will also be able to store important documents on this encryption- protected site.

You will be notified by email when the quarterly information is available, and you will be directed to our website, from which you will log into your portal.  In addition, many useful reports will be available, including realized and unrealized gain/loss reports.  This will be especially convenient for tax planning purposes.  In order to set up your portal, you will need to contact your advisor’s administrative assistant, who will walk you through the process, and answer any questions you may have.

Third Quarter 2017 Asset Class Returns

The third quarter, much like the second, saw attractive, middle to high single digit returns by most equity asset classes.  International and Emerging Markets were again modestly superior to Domestic equity asset classes.  The lower valuations of International equities are helping to slowly earn back some of their lagging performance in 2015 and 2016.  Generally, corporate earnings on both sides of the Atlantic have been positive.  In addition, inflation has continued to be lower than expected, which means bonds are able to earn their full interest plus fractional capital gains.  This slow growth environment has been the path of the global economy for a few years, and does not appear to be changing in the near or intermediate term.

Market volatility is also very muted, continuing this multiyear trend.   Many investors may forget what normal market fluctuation looks like.  It has been over 1 year since the last market correction of 5% or more.  Below is a chart to help remind us what “normal” volatility looks like.

As you can see, we have not had “normal” volatility for several years.  It is only a matter of time before normalcy returns.  Remember that when it does, it is both customary and typical.  The “abnormal” is what we have been experiencing for the past several years.  

In the meantime, we’ll be entering the “big three” holiday seasons, which will undoubtedly remind us all that family and friends should be the most important topics on our minds.  Enjoy yours!


Frederick F. Kramer IV, JD
Co-Chief Investment Officer