• Bill Bullock

2019 First Quarter

The post-Christmas Eve rally continued into our first quarter this year with solid percentage gains across the board. Our domestic and foreign equities were up high-single digits to the mid-teens and our small and mid-cap stocks were also up in the mid-teens. Even our bonds averaged 2-3% for the first three months. What a recovery! After a brief review of this past quarter, I’d like to pick up where we left off with our year-end letter and discuss the stock and bond outlook over the next 10 years.


In my opinion, there were three main contributors to the first quarter stock market rally. First, the market was oversold through the Christmas Eve sell-off and bargain hunters took advantage and purchased some of the beaten up, but still fundamentally strong corporations. Second, the Federal Reserve continued to make it clear that they were going to end their robotic quarterly 0.25% point interest rate increases (i.e. the Fed was going to be more flexible) given the global economic slowdown in the fourth quarter. Third, there was strong anticipation for a China and US trade agreement. Conversely, looking forward over the next few months, anything short of an agreement with the Chinese, I believe, would be unwelcomed news for the market. In fact, the market has been so strong this past quarter, a signed trade agreement might be a “sell-the-news” event where the market has been anticipating the signed agreement for so long that when it finally occurs, investors will rush to take their profits. Time will tell.


Obviously, the short-term is one thing, but anyone with investments in equities should be concerned about the long-run. Will my faith in equities pay-off over the next 5-10 years given the extraordinary run-up we have participated in over the past 10 years? This is where I turn to the likes of Vanguard where one could argue that this organization is more dis-interested in rosy outlooks because if you don’t like stocks, Vanguard will have many other bond or alternative asset options they could sell you. With that said, Vanguard is expecting an average annual return of 4-6% for U.S. equities and a 6-8% average return for foreign equities over the next 10 years. They are also expecting 2-4% average annual returns for international bonds with U.S. fixed income slightly lower than that. While these expectations are lower than what we have seen in the past, they will still be greater than CD yields. I have found that most other analysts predicting the next 10 years have predicted similar if not the exact same expectations. Therefore, I still believe stocks will offer investors’ superior returns over the next 10-year time period; however, we will need to be prepared for lower annual returns than what we have historically received.


On a personal note, as of May 31st, Katie will be retiring from full-time work at American Investment Advisors, Inc. after close to 14 years of working with me - a tough assignment indeed! I am hoping to have her come back in the fall on a part-time basis as her replacement, Nicole Ricci (a junior majoring in Economics at the University of Wisconsin-Madison), has one more year to go before graduation. I’m hoping Nicole will also be working part-time at AIAI this fall. I wanted to thank Katie for all of her contributions to AIAI over the years. I will certainly miss her loyalty, quick wit and happy disposition. She has been a pleasure to work with and I look forward to working with her in a part-time capacity later this year. Best wishes Katie!


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