September 2, 2019 BARRON’S 5
The Perils of September
L
AZY, HAZY, CRAZY DAYS OF SUMMER?
August certainly was crazy for the global finan-
cial markets, and the outlook is unquestionably
hazy as the season unofficially ends with Monday’s
Labor Day holiday. Lazy might have been the best invest-
ment strategy, however, if that meant setting and forgetting
a diversified stock-and-bond portfolio.
August saw wild swings in the U.S. markets, buffeted by
the three Ts: tweets, trade, and Treasuries.
Through Thursday, the SPDR S&P 500
exchange-traded fund (ticker: SPY), which
tracks the U.S. large-capitalization market, had
a total return for August of minus 2.85%,
according to Morningstar data. That surely
stings most readers.
The iShares Core U.S. Aggregate Bond
ETF (AGG), which tracks the benchmark for
the taxable-bond market, returned a positive
2.73% in the month, as U.S. bonds slid in reac-
tion to the jump in negative-yielding global bonds to $17 tril-
lion, an increase of $3 trillion in the month.
But a traditional 60% stock, 40% bond portfolio, using
these ETFs, would be down just 0.62%—not bad, given the
recent volatility.
For the year through Thursday, a 60 SPY/40 AGG port-
folio would show a sparkling return of 14.45%, consisting of
18.16% from the equity side and 8.89% from the debt por-
tion. But for the past 12 months, the 60/40 portfolio returned
5.53%, better than the 2.37% from the stock side, benefiting
from 10.26% from the fixed-income side. Score one for old-
fashioned diversification.
Whether that will work quite as well as the markets head
into their most treacherous time of the year is another matter.
History shows that, since 1950, September has been the
worst month for the Dow Jones Industrial Average and the
S&P 500, according to the Stock Trader’s Almanac, and the
worst for the Nasdaq Composite since its inception in 1971.
If anything, the history has been even worse in years pre-
ceding presidential elections.
The conundrum facing investors is that bonds that have
rallied in price (and fallen in yield) may provide less protec-
tion now to equity portfolios.
The collapse in Treasury yields, to about 1.5% for notes
due in 10 years and below 2% for 30-year bonds, already
incorporates expectations that the Federal Reserve will
lower its benchmark rate three times, in one-quarter-
percentage-point increments by next spring, from the
current 2% to 2.25%.
The headlong dive in global bond yields has prompted
calls that U.S. Treasuries could also be headed to zero
yields. That would mark an apt contrast to predictions that
bond yields could only rise further as they peaked at 15%
in 1981, as Jim Grant points out in his column this week.
Never say never, but Evercore ISI’s capital markets
maven, Stan Shipley, notes that technical and
fundamental factors suggest a reversal of the
bond rally—assuming that the U.S. doesn’t fall
into a recession, which he sees as having just
a 30% probability.
The inverted yield curve—with the two-
year Treasury note outyielding the 10-year—is
sending the strongest warning signal. But con-
sumer spending, which accounts for upward of
70% of the U.S. economy, remains robust. That
reflects the employment situation, certainly
something to celebrate this Labor Day weekend.
As Wall Street heads back to work, the main event will
be the August jobs report, due out on Friday morning. The
consensus call is for a virtual replay of the previous month’s
numbers, which showed a 164,000 rise in nonfarm payrolls,
with 148,000 in the private sector; a 3.7% jobless rate; and
average hourly earnings up 3.2% from the level a year ago.
Those numbers wouldn’t stand in the way of a rate cut at
the Sept. 17-18 Federal Open Market Committee meeting,
and Fed Chairman Jerome Powell may provide further hints
in a speech scheduled later on Friday in Switzerland.
The twists and turns of the trade fight, meanwhile, will
keep everybody on edge.
I
N THE WACKY INVESTMENT WORLD IN WHICH WE LIVE,
bonds yielding nothing or less are bought for capital
gains, while stocks, the historical engine of capital ap-
preciation, are bought for income. Bonds with negative
yields can provide positive returns—if those yields plumb
ever deeper negative territory, boosting the securities’
prices, as explained here several weeks ago.
In a world with $17 trillion of bonds with subzero yields,
such desperate maneuvers are needed to eke out a return.
The obligations of the government of Italy yield less than 1%,
even though Italy scarcely has a government. Only when
compared with 10-year German Bunds with a minus 0.7%
yield can it be explained. No wonder the world rushes to the
A60/40stock-and-
bondportfoliorode
outawildAugust.
Butthehistorically
worstmonthawaits.
Up & Down Wall Street
byRandall W. Forsyth