Market Review Q1 2019

April 10, 201914 Min Read
Quarterly Market Review

The Positive

Continuing low unemployment rates, recent wage growth for U.S. workers, and robust global stock market gains are all reasons to cheer the new year. Also, the S&P 500 notched its best quarterly gain since September 2009.

The Negative

A U.S. economic recession continues to look likely in the next 18 months, as corporate profit margins are falling, business investment and global trade is slowing, and the one-time effects from tax cuts are wearing off. (Yun Li, “With wages on the rise, Goldman Sachs has a ‘low labor costs’ stock strategy that beats the market”, CNBC, Feb 12, 2019; “Globalization has faltered”, The Economist, Jan 24, 2019; Howard Gleckman, “What 2018’s Economic Data Tell Us About The TCJA”, Forbes, Mar 5, 2019;

The Big Gambit

Recent accommodative Federal Reserve announcements have created near-term tailwinds for the stock market, but these policies could leave the economy and Fed less prepared to manage the inevitable future downturn.

Corporate profits have expanded throughout 2018, partially due to one-time effects from tax reform
Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, MSCI Inc, Contact United Income for more details.
But, wages have been steadily increasing as labor markets tighten, which may reduce profit margins in 2019
Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, MSCI Inc, Contact United Income for more details.
Global stocks recovered nicely from the pullback at the end of last year and markets are nearing all-time highs
Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, MSCI Inc, Contact United Income for more details.
But, economic uncertainty remains elevated across the globe as Brexit and trade war fears linger
Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, MSCI Inc, Contact United Income for more details.

Dispatches from the Desk

Global stock markets came out of the gates strong in 2019, recording the third fastest start to a year in the last 30 years. It’s easy to understand why investors may be feeling whiplashed, since this leap in share prices followed 2018’s record of the worst year for global stocks since the financial crisis in 2008 (As measured by MSCI ACWI Index (gross)) Perhaps because of that, investment product manufacturers approach 2 United Income and our wealth management team regularly with what are pitched as magical products or investment strategies that will protect investors from suffering losses during downturns, but not hold them back from benefiting during upswings. As academic-based, data-driven, long-term investors, we know there is little to believe or trust about these claims. Being that these salesmen have swung into high gear during this volatile period, we thought it would be an ideal time to evaluate two approaches often used in these products, and compare them to a simple stock/bond diversification strategy that is similar to United Income’s investment approach.

Approach #1 Downside-Protection

One group of products sold to investors (and their advisors) purport to protect account balances from suffering losses in the market by buying and selling investment products called options, which are contracts to buy or sell a security at a pre-determined price. ( One popular version that can be implemented alongside your current portfolio is called a “Put-Protection Strategy”. This approach aims to provide insurance by purchasing put options, which enable you to sell an investment at a specified price in the future. For instance, if you held a put option to sell one share of a company (currently valued at $5) for a price of $3 and that company fell from $5 to $2, then you could exercise your put option and make a $1 profit. Your exact payoff from the put option depends on how much the put option costs, known as the premium, and the price point of the option, known as the strike price.

An even more esoteric version of this approach is an “Option-Collar Strategy”. Rather than just purchasing put contracts, or options to sell investments at pre-determined prices, this approach also sells call options, or contracts to buy investments at pre-determined prices. The advertised benefit of this more complicated approach is that it aims to reduce volatility for investors even further by generating a steady stream of income from the call-option premium, or the value of the call-option contract.

Sounds pretty sophisticated and smart, right?

Unfortunately, that is not the whole story. First, no one knows what the future holds, including when markets may fall. This means that for option strategies to work, you have to constantly pay these option manufacturers or intermediaries to provide downside protection, including those periods when having insurance didn’t pay off. And, at some point, the cost of the insurance is greater than the losses you (might) have incurred.

You should be wary of products, approaches, and advisors that imply portfolio protection does not limit wealth potential. Backed by data-driven research, we find diversification through bonds is the best way to manage risk while still capturing upside.

Second, the price of insurance increases when market volatility increases, as we have been experiencing recently. This is no different from any other type of insurance – for instance, it is much more expensive to insure a home in a coastal area prone to flooding than a home on a mountain plain. Similarly, drivers with lots of tickets have to pay more for auto insurance than drivers with clean records since their expected “accident rate” is higher. This means that option-based products become more expensive to buy precisely when our brains are telling us to be fearful of stock markets. And, because options are sold to manage anxiety, the price is often cost-prohibitive since investor’s volatility expectations are often greater than the volatility that actually transpires.

Together, the cost of “rolling” insurance contracts and the fact that insurance is expensive when you need it most make options much less attractive than they are often pitched to be in our experience. But, what do the data have to say? Luckily, the Chicago Board Options Exchange (CBOE) covers these two downside-protection strategies in great detail. (CBOE S&P 500 5% Put Protection Index simulates a downside-protection strategy that buys the S&P 500 and simultaneously purchases put options at a strike price 5% below the current level of the S&P 500. The CBOE S&P 500 95-110 Collar Index is similar to the Put-Protection Strategy but sells call options at a strike price 10% above the current level of the S&P 500 as well. ) As advertised, between 1987 and 2018, both downside-protection strategies reduce portfolio volatility for investors, which is one of their objectives. But, it comes at a very high wealth penalty for their customers: total investment returns are about 2% percentage points lower per year than a simple 60/40 Portfolio, which is described in Approach #3 (and this does not even account for the price of these products, making these products even less attractive). In conclusion, the medicine can leave you sicker than the underlying ailment you were trying to cure!

Average Annual Total Investment Returns (percent)
The Dollar-Cost Averaging approach underperformed...

Approach #2 – Market Timing

Another investment strategy often sold to investors (and their advisors) aims to protect investors from losing money in down markets (while maintaining their upside in up markets) by moving money in and out of securities. One of these approaches we hear about when anxiety levels are high is called “Dollar-Cost Averaging,” which is a strategy that purchases securities at intervals over a specified time frame. The thinking is that if no one knows the future, then on any given day the price of a security might be lower or higher than it is tomorrow. By spreading out your purchases (or sales) over time, you are more likely to get an average price than one that is extreme in one direction or another.

This also sounds pretty good. But, here too, the story does not stop there. Again, no one can predict the future, so there is no way to know the appropriate time frame to spread out your trading – should it be one week, one year, or ten years? Similarly, there is no telling whether prices will actually fall during that time frame, whatever it might be. By staying on the sidelines, you could be losing out on a lot of wealth generation since returns are expected to be positive and you could be receiving dividends on your investments. Regardless of market anxiety levels, investing always comes with uncertainty, after all.

Together, those factors make any approach that tries to “time markets” risky and possibly dangerous. However, let’s look at data before making a decision. For this analysis, we simulate how well a dollar-cost averaging strategy would perform compared to investing the entire balance at the beginning of the year. Specifically, the dollar-cost averaging strategy invests 1/12th of the total amount of the intended investment each month for the entire year (e.g. 8.3% is invested in January, 8.3% in February, and so on).

Using this approach, in just 5 of the 32 years from 1987 to 2018, or 15.6% of the time, it would have been more advantageous to use the Dollar-Cost Averaging Strategy vs. investing in the S&P 500 from the beginning of the year. Similarly, in 9 of the 32 years from 1987 to 2018, or 28.1% of the time, it would have been more advantageous to use the Dollar-Cost Averaging Strategy vs. investing in the 60/40 Portfolio from the beginning of the year. Most importantly, in 5 of the 6 years that the S&P 500 produced negative returns, or 83% of the time, you would have had better performance by investing in the 60/40 Portfolio vs. the Dollar-Cost Averaging Strategy. Here, too, the data clearly indicate that approaches striving to time the market can come with a very high wealth penalty for investors.

Approach #3 – Stock/Bond Diversification Approach

Given that option-based and market-timing approaches are intellectually and empirically suspect, is there anything an investor can do to limit losses during market downturns while maintaining upside potential when markets are increasing in value? After consulting with academics and analyzing the data, we believe the best approach to protect and build wealth is to diversify investments across stocks and bonds, since these two types of investments can behave differently across time periods (when one is down, the other can be up). Much like it is beneficial to have different clothing for different seasons, a diversified portfolio should contain various securities that perform well in varying market climates.

While the combination of stocks and bonds is based on your personal risk preferences, two common approaches are a 60% stock/40% bond allocation and a 30% stock/70% bond allocation. Let’s refer to them as the 60/40 Portfolio and the 30/70 Portfolio (As measured by a 60% S&P 500 and 40% Bloomberg Barclays U.S. Aggregate Bond Index portfolio, and a 30% S&P 500 and 70% Bloomberg Barclays U.S. Aggregate Bond Index portfolio, respectively, each dynamically rebalanced at 5% deviation), respectively. According to backtested analysis, both diversified portfolios easily outperform the option-based and market-timing approaches, while also reducing volatility significantly and protecting the portfolio when market returns are negative. Critically, though, to keep these portfolios on track and realize this value, 18 rebalances were required for the 60/40 Portfolio and 17 rebalances for the 30/70 Portfolio over the 32-year period. At United Income, our trading algorithms dynamically rebalance client portfolios so you stay on target – without a rebalancing process, your 60/40 Portfolio could become much riskier over time! (Past performance is NOT an indicator of future actual results. This information is provided for illustrative purposes only to indicate the historical performance of the investing approach over the 1987 to 2018 period. Backtested performance is developed with the benefit of hindsight and has inherent limitations. Results do not reflect actual trading in accounts or the effect of material economic and market factors on the decision-making process. Further, backtesting allows the security selection methodology to be adjusted until past returns are maximized. Actual performance may differ significantly from backtested performance. Results are adjusted to reflect the reinvestment of dividends and other income and, except where otherwise indicated, are presented gross of fees and do not include the effect of transaction costs, advisory fees, or expenses. All investments have inherent risks. Investment strategies, such as asset allocation or diversification, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. )

Our Verdict

The data are clear: you should be wary of products, approaches, and advisors that suggest you can be protected from losing money, while not impacting growth potential. All of these strategies limit your wealth potential by reducing risk. But, we believe that the one approach that comes closest to a neutral impact is through diversification with bonds. And the best part? Diversification is a cost-effective strategy to implement, which is why it’s featured as part of United Income’s low-cost, tax-efficient investment strategy. It’s also why we avoid these marketing gimmick products and approaches (designed to make you feel good, but at a potentially large cost to your wealth).

At United Income, our financial planning technology and wealth management team can help you determine an appropriate allocation between stocks and bonds. We also go one step further by asking you about the risk you want to take for each of your future spending or giving goals. For instance, you probably want to invest the money earmarked for your mortgage payments differently than the money you are saving to give to your children or a charity – something that our team and software can do for you.

Our technology then evaluates your assets, income, risk appetite and spending needs, translating them into a personalized investment portfolio with an aim to reduce taxes, increase retirement benefits, and generate investment returns. The resulting portfolio is diversified across stocks and bonds, and can provide appropriate, cost-effective protection when stock markets falter. (Mutual funds, exchange-traded funds, and other securities are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that an investment strategy proposed will by United Income will achieve its goal.)

If you would like to learn more about the how United Income translates your unique financial picture into a diversified investment portfolio, please contact your wealth manager today – or call (202) 539-1039.

Member Results

At United Income, we are always focused on helping our members (We refer to clients of the United Income Wrap Program as our “members”. Performance information regarding our members in this letter does not include information from clients of our Traditional Portfolio Management Services or Traditional Wrap Fee Program.) generate wealth. Holistic wealth generation is one way we help our members protect their portfolio, regardless of what stock markets throw our way. In addition to investment returns, we focus on tax savings, increasing the value of your retirement benefits, and keeping costs low because they can generate a more sustainable wealth return for you, our member. Here you will find data highlighting the power of this unified approach.

Investment Returns

8 of the 19 ETFs that we use to build portfolios in member accounts outperformed relevant benchmarks over the trailing 12 months. Our diversified investment approach focuses on multiple strategies that have historically performed well. Unfortunately, our Value strategy has recently been lagging the market, which detracted from investment returns.


Lower Taxes

For members that joined United Income in the last 6 months, their average tax savings (Estimated tax savings are measured as 17.5% x (long-term losses realized) + 24% x (short-term losses realized) across all taxable member accounts divided by ending account balances. These realized losses are reflective of trades where cost basis information was available and recorded within United Income. These rates reflect a middle-tier of the tax rates that are applicable to members. Individual member tax rates could be higher or lower than the rates we use in our estimated tax savings calculations. Actual tax savings will depend on the specific circumstances of each member and may differ significantly from amounts calculated. United Income does not represent in any manner that its tax-loss harvesting strategy will result in any particular tax consequence or that specific benefits will be obtained for any individual investor. The tax-loss harvesting service is not intended as tax advice. Members should consult their personal tax advisor as to whether tax-loss harvesting is a suitable strategy, given the member’s particular circumstances. The tax consequences of tax-loss harvesting are complex and uncertain and may be challenged by the IRS or any other tax authority. The internal revenue code, as well as judicial and administrative interpretations of it, are subject to change and could have a material impact on the consequence of United Income’s tax-loss harvesting approach. There is limited authority governing whether an ETF is “substantially identical” to another ETF for the purpose of the wash sale rule. Accordingly, there can be no assurance regarding how the IRS would resolve this question in specific contexts. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results. ) has been 2 bps or 0.02%. For members that joined United Income more than 6 months ago, their average tax savings has been 31 bps or 0.31%. We are currently forecasting this will add up to an average of $16,500 in extra wealth for each $100,000 invested, or an estimated tax savings of 16.5%, in taxable accounts for the average member over their lifetime (The average member is defined as 60 years old with life expectancy of 83 years old, based on Social Security’s Actual Life Table; Good things come to those who wait!

Lower Fees

On average, members that have disclosed their previous advisor’s fee rate have saved $187 per month, or $2,240 per year, in advisory fees. We are currently forecasting this will add up to an average of $51,509 in extra wealth for the average member over their lifetime. (The average member is defined as 60 years old with life expectancy of 83 years old, based on Social Security’s Actual Life Table; and account balances are estimated to remain flat.) In addition, a 60% stock/40% bond portfolio comprised of the ETFs we use to build member portfolios can save 0.30% per year in expense costs, relative to the average mutual fund. (Morningstar US Fund Fee Study, 2016. Average mutual fund fee calculated based on the asset-weighted mutual fund fee for a portfolio of 30% US Equities, 30% International Equities, and 40% Taxable Bonds, which is the same allocation a United Income member electing 60% equity and 40% fixed income would receive in their portfolio. ) We are currently forecasting this will add up to $6,900 in extra wealth for each $100,000 invested for the average member over their lifetime. (The average member is defined as 60 years old with life expectancy of 83 years old, based on Social Security’s Actual Life Table;


On the Horizon

We recently launched Medicare Advice through United Income! We extensively reviewed Medicare strategies and collaborated with experts to come up with comprehensive, tailored advice. If you would like to learn more about Medicare or are looking for help in determining which parts to claim, do not hesitate to reach out to your wealth manager, or try it for yourself! You can access these features by logging into your United Income account and clicking ‘Medicare Advice’ located in the top-right corner of your screen.


As of March 31, 2019
Russell 3000 Index (benchmark)
SCHX: Schwab US Large-Cap ETF
USMV: iShares Edge MSCI Min Vol USA ETF
QUAL: iShares Edge MSCI USA Quality Factor ETF
VLUE: iShares Edge MSCI USA Value Factor ETF
MTUM: iShares Edge MSCI USA Momentum Factor ETF
XSLV: Invesco S&P Small Cap Low Volatility ETF
FNDA: Schwab Fundamental US Small Company Index ETF
MSCI All-Country World ex-USA Index (benchmark)
GSIE: Goldman Sachs ActiveBeta International Equity ETF
FNDC: Schwab Fundamental International Small Company Index ETF
GEM: Goldman Sachs ActiveBeta Emerging Markets Equity ETF
DGS: WisdomTree Emerging Markets Small Cap Dividend Fund ETF
Fixed Income
Bloomberg Barclays U.S. Aggregate Index (benchmark)
BND: Vanguard Total Bond Market ETF
FLRN: SPDR Bloomberg Barclays Investment Grade Floating Rate ETF
VGSH: Vanguard Short-Term Treasury ETF
VGIT: Vanguard Intermediate-Term Treasury ETF
VCIT: Vanguard Intermediate-Term Corporate Bond ETF
VTIP: Vanguard Short-Term Inlation-Protected Securities ETF
BNDX: Vanguard Total International Bond ETF
EMB: iShares J.P. Morgan USD Emerging Markets Bond ETF
All data is rounded to the nearest hundredth of a percent. Data is trailing total returns provided by Morningstar, Inc. Past performance is not indicative of future results.