Market Review Q2 2019

July 8, 201914 Min Read
Quarterly Market Review

The Positive

Global stocks broadly increased in value, including record-high values in the U.S., as trade frictions moderated, consumer sentiment improved, ( and expectations for lower interest rates increased among investors. (As measured by the S&P 500)

The Negative

Tariffs continued to stifle global trade, tensions increased between the U.S. and Iran, and U.S. factory output continued to decline, (Katia Dmitrieva, “U.S. factory output falls for a third time in four months”, Bloomberg, May 15, 2019; all of which contributed to sustained expectations for the start of a recession within the next year.

The Big Gambit

Both U.S. political parties have embraced debt, which has skyrocketed (as a share of the economy) to levels not seen since World War II. (Federal Reserve Bank of St. Louis and U.S. Office of Management and Budget, Gross Federal Debt as Percent of Gross Domestic Product [GFDGDPA188S], retrieved from FRED, Federal Reserve Bank of St. Louis, June 24, 2019; While bolstering near-term growth, high debt could lead to a crisis for future generations of Americans.

Unemployment continues to fall, increasing wages for workers and providing a spending growth engine for the economy.
Sources: U.S. Bureau of Labor Statistics, S&P Dow Jones Indices LLC, Contact United Income for more details.
But, fewer employers can find qualified people for job openings, which can stifle growth if jobs go unfilled.
Sources: U.S. Bureau of Labor Statistics, S&P Dow Jones Indices LLC, Contact United Income for more details.
The U.S. stock market continues to soar in value, which builds wealth for investors.
Sources: U.S. Bureau of Labor Statistics, S&P Dow Jones Indices LLC, Contact United Income for more details.
But, stock valuations are still below their recent peak values, suggesting market prices may continue to rise.
Sources: U.S. Bureau of Labor Statistics, S&P Dow Jones Indices LLC, Contact United Income for more details.

Dispatches from the Desk

The U.S.-China trade dispute intensified throughout the second quarter of 2019, punctuated by additional tariffs and steps to attack operations at specific companies. Aggressive actions such as these helped to push down U.S. exports to China in May by over 12 percent compared to a year earlier (while imports from China were down by about 10 percent during the same time period). (U.S. Census Bureau; Since falling trade between two major economies can hurt economic growth – something politicians in both democratic and communist countries are incentivized to drive – China and the U.S. agreed to resume negotiations by the end of the quarter. This seesawing international drama has dominated the news over the past three months, so we decided to look at it from three different perspectives in this quarter’s newsletter.

First, we provide an update to our analysis of trade with China that we circulated in Q3 2018 to consider the roots of the trade war and how much it matters to the U.S. This is a perspective that seems to be sorely lacking in recent news coverage. Second, we look at how tariffs impact investment returns, since the day-to-day market drama caused by trade disputes, like the U.S.-China spat, can belie the long-term impact. Finally, we consider how market volatility, such as that caused by trade wars, impacts United Income’s investment strategy. Together, our hope is that these data-informed perspectives will help you look past the news and take comfort in your United Income investment plan.

The U.S. Economy’s Dependency on Trade and China

As a result of bipartisan efforts to expand global trade in recent decades, the U.S. economy has become steadily more dependent on trading its goods and services with foreign countries. One sign of this dependency is illuminated by examining the total value of traded goods and services with foreign countries as a percentage of the total estimated value of the U.S. economy.

Using this measure, trade with the U.S. grew from about 9 percent of the value of the U.S. economy in 1960 to over 27 percent today. (U.S. Bureau of Economic Analysis, Shares of gross domestic product: Exports of goods and services [B020RE1Q156NBEA] + Shares of gross domestic product: Imports of goods and services [B021RE1A156NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; ) As high as that number is, it is much lower than in most other countries. In fact, the World Bank estimates that the average country generates more than 55 percent of their economy’s value through trade with other countries. (World Bank national accounts data, and OECD National Accounts data files) This means that while the U.S. economy is increasingly reliant on trading with foreign countries, it is relatively less dependent than nearly all other countries, including every other major economy. (Ibid.)

Less dependency on foreign countries and the massive size of the U.S. economy have created strong advantages for the U.S. in the global landscape. Beginning in earnest with the Reciprocal Trade Agreements Act of 1934, U.S. leaders of both political parties have used that power to lower the costs to trade with institutions and individuals from foreign countries. As one sign of that, tariff rates (or taxes on foreign goods and services) in the U.S. fell from 60% in 1930 to less than 3% in recent years. (I.M. Destler, “America’s uneasy history with free trade”, Harvard Business Review, Apr 28, 2016; For investors, this public policy leadership means that U.S. companies have benefited from higher profit margins (and more operating capital), which drove stock prices higher than they might otherwise have been without these interventions. For consumers, it has meant more money to buy goods and services, along with more choices.

As a share of the U.S. economy, global trade with the U.S. has grown by 3x since 1960, but today, U.S. imports from China only make up 2.7% of the U.S. economy.

It was against this multi-decade backdrop of trade liberalization by U.S. leaders that China emerged as a major prospective trading partner in recent years, highlighted by the normalization of trade relations with China in 2000 and their entry into the World Trade Organization in 2001. In the aftermath of those milestones, U.S. leaders initially were focused on helping U.S. companies setup factories and employ low-cost workers in China, which manufactured goods that were then sent to be sold in other countries. Of the U.S. companies that seized this opportunity, Apple is the most prominent, now employing millions of Chinese workers. (“Does Apple’s boss have a Plan B in China?”, The Economist, May 30, 2019; But, trade discussions with China quickly evolved to also focus on helping U.S. companies sell their goods and services to the increasingly wealthy consumers and companies in China. A good example to highlight this focus is through Chinese dependence on foreign trade. Trade with foreign countries accounted for $7 of every $10 of value generated in the Chinese economy in 2006, whereas today it is down to $4, even while the Chinese economy grew to become the world’s second largest economy during the same time period. (World Bank national accounts data, and OECD National Accounts data files.)

Despite the broadening interactions between China and the U.S. in recent decades, trade with China still remains a very small share of the U.S. economy. For example, U.S. imports from China accounted for about 2.7 percent of the total U.S. economy in 2018. (Based on 2018 U.S. imports from China of $557.9B ( and 2018 U.S. GDP of $20.50T ( While that economic value is limited, the costs of trading with China have been deemed to be quite high, in contrast.

As we reviewed at length in our Q3 2018 investor letter, intellectual property rights of U.S. firms in China have been compromised. The Chinese government also continues to subsidize their state-owned and private enterprises heavily, which creates an uneven playing field and reduces profit margins for U.S. firms. While there are other issues creating tension between the two countries, these two problems are at the heart of the current trade dispute, which has spurred mounting tariffs and threats against both U.S. and Chinese companies. Leaders in the U.S. are balancing a desire to generate short-term growth from trading with China (which has been slowed by this fight) with long-term costs created from losing America’s intellectual property and competitive advantage (which is difficult to quantify).

Our Verdict

We expect that economic pressures will motivate both China and the U.S. to find a way to resolve the current trade disputes and lower tariffs. But, it remains to be seen how much of the U.S.’s long-term economic advantage will be conceded in the process.

The Impact of Trade Wars on Investment Returns

Economist Austan Goolsbee tells a fun story about tariffs that goes something like this: one night, his Aunt Trina and Uncle Bob are sitting across from each other eating Trina’s lasagna for dinner. (Paul Solman, “Austan Goolsbee says the Trump tariffs are like his Aunt Trina’s lasagna”, PBS News Hour, Mar 13, 2018; Bob is a good husband and tries to faithfully eat the home-cooked meal, even though he really does not like it. Later that night when he is cleaning dishes, he dumps his rather large portion of leftovers down the kitchen drain. Unfortunately, the portions are so large and the lasagna is so thick, the sink gets clogged. To flush out the drain, Uncle Bob decides to buy a product called “The Bomb”, which is a plunger shaped like a firearm that shoots out chemicals with similar force. Uncle Bob points the plunger at the drain and fires a few charges into the drain, clearing it of all of the lasagna. The only problem is that the neighbors living below Aunt Trina and Uncle Bob now have a hole in their ceiling and Trina’s lasagna is all over their apartment.

Using tariffs as a blunt policy creates winners and losers, as some industries benefit at the expense of others, which blurs any economic value.

This is the problem and challenge with tariffs – while it may help one industry, like U.S. steel producers, it can hurt other industries, like auto parts or airline manufacturers. The downstream industries are like Aunt Trina and Uncle Bob’s downstairs neighbors, covered in leftover lasagna. These externalities associated with trade wars are why the markets have tended to react negatively every time American or Chinese leaders announce a new trade tariff or threat of action against a specific company or sector of the economy. While it is designed to solve a specific economic problem, the economy more generally gets covered with lasagna and can slow down.

The question for investors is how best should we respond? Recent history offers a good guide. Since tariffs were first imposed in April 2018, for instance, the S&P 500 has grown by 11.2% through June 2019. Many economists believe growth would have been higher if those tariffs did not exist. For instance, the New York Federal Reserve recently estimated that U.S. households will pay $831 in extra costs per year, both from tariffs passed onto them and from having to buy goods from countries with higher labor costs. (Mary Amiti, Stephen J. Redding, and David Weinstein, “The impact of the 2018 trade war on U.S. prices and welfare”, NBER Working Paper Series, Mar 2019; In turn, this means fewer dollars are available to buy other goods and services, which curbs growth. Nonetheless, reducing stock exposure since the trade war started in April 2018 clearly would have been a costly mistake.

Taking an even higher-level view, market data are clear that investors who trade, or turnover, their portfolio more often (because of dramatic news like China-U.S. trade tensions) tend to underperform.

In a study by Dimensional Fund Advisors, for instance, over the last 10 years from 2009 – 2018, U.S. stock mutual funds that trade less often outperformed their benchmark 2.3x more often than more restless funds. (“Mutual Fund Landscape 2019”, Dimensional Fund Advisors, Apr 18, 2019; available on request; and “Trade less often” is defined as the lowest quartile of turnover and “More skittish” is defined as the highest quartile of turnover. 32% of mutual funds with the lowest quartile of turnover outperformed their benchmark while 14% of mutual funds with the highest quartile of turnover outperformed their benchmark.) This means that whether it is trade tensions with a foreign country or factory output numbers in the U.S., the data indicate that the less often you react to news by changing your portfolio, the more wealth you can generate.

Whether it is trade tensions or factory output numbers, the data indicate that you are 2.3x more likely to outperform if you hold your portfolio steady as news breaks.

Our Verdict

Trade policy and tariff threats generate dramatic headlines but reacting to news is a very risky investment strategy. The data indicate that a balanced, patient approach to your portfolio can grow your wealth faster and with less drama over time.

Managing Volatility from Trade Wars and Other News in Your Portfolio

While we established above that jittery investment strategies, which react to news, tend to build less wealth than long-term strategies, not all investors are focused on maximizing wealth. Instead, some want to minimize volatility and the emotional turbulence than can accompany seeing your investment balance move up-and-down. For those investors, a good starting point is to discuss with your wealth manager how much risk you want and need to take.

We utilize several investment strategies that can improve the chance your portfolio is exposed to an outperforming strategy, and, in doing so, can minimize the volatility to which you have exposure. We also feature a defensive equity strategy, which we can weight more heavily in your portfolio if you would like to reduce your total volatility. This will likely reduce your wealth potential over time, but it will also reduce how much your investment account balance changes because of trade wars and other emotional news items. Regardless of how much focus you have on building wealth, we also strive to spread our client’s investment portfolios around different parts of the globe so portfolios can better withstand potential risks that may arise in a single country.

Our Verdict

Our wealth management and investment teams are focused on your needs and preferences and are here to serve you. We don’t know what the future has in store, and nor does anyone else, but with our help, your plan and strategy can stay aligned with your objectives and preferences.

If you would like to learn more about how your portfolio adjusts its risk exposure dynamically, please contact your wealth manager today – or call 202-539-1039.

Member Results

At United Income, we are always focused on helping our members generate wealth.We always like starting with your financial plan and goals because it helps your wealth manager to create strategies that can generate wealth in multiple ways. 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. (We refer to clients of the United Income Wrap Program as our “customers”. Performance information regarding our customers in this letter does not include information from clients of our Traditional Portfolio Management Services or Traditional Wrap Fee Program.)

Here you will find data highlighting the power of this unified approach.

Investment Returns

9 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 and strategies that can help to minimize your risk.

Lower Taxes

For members that joined United Income more than 6 months ago, their average tax savings has been 31 bps or 0.31%; members that joined United Income in the last 6 months, average tax savings has been 2 bps or 0.02%. (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. ) 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 $163 per month, or $1,957 per year, in advisory fees. We are currently forecasting this will add up to an average of $45,018 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 0.16% per year in expense costs, relative to the average mutual fund. (Morningstar US Fund Fee Study, 2018. Average mutual fund fee calculated based on the asset-weighted mutual fund fee for a portfolio of 34% US Equities, 26% 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. The fund fee from Morningstar is the average of Active and Passive for each category. ) We are currently forecasting this will add up to $18,400 in extra wealth for each $500,000 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 have been working to expand the investment strategies available to you in your portfolio. Whether you want to invest in environmentally-friendly investments or want to reduce your tax exposure with municipal bonds, we will have an option for you. We will even have an individual stock portfolio available for your U.S. large-cap exposure, instead of ETFs. You can work with your wealth manager to understand and evaluate the options you can pick from. Our goal is to challenge and refine our thinking about investment management continually, based on new academic research, data insights, and client ideas about their individual preferences. We’ll share more about this exciting expansion to further personalize our ability to build and protect wealth for you when the time comes.


As of June 30, 2019
Russell 3000 Index (benchmark)
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
EFAV: iShares Edge MSCI Min Vol EAFE ETF
FNDC: Schwab Fundamental International Small Company Index ETF
GEM: Goldman Sachs ActiveBeta Emerging Markets Equity ETF
EEMV: iShares Edge MSCI Min Vol Emerging Markets ETF
DGS: WisdomTree Emerging Markets Small Cap Dividend Fund ETF
Fixed Income
Bloomberg Barclays U.S. Aggregate Index (benchmark)
BOND: PIMCO Total Bond Market ETF
FLRN: SPDR Bloomberg Barclays Investment Grade Floating Rate ETF
VGIT: Vanguard Intermediate-Term Treasury ETF
VCIT: Vanguard Intermediate-Term Corporate Bond ETF
VTIP: Vanguard Short-Term Inflation-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.