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Salal Investment Services Newsletter, Third Quarter 2019

photo of Adrian Hedwig

Adrian A. Hedwig

Financial Advisor, CUSO Financial Services, L.P.
Available at all Salal Credit Union branches
P: 206.607.3481
F. 206.298.3492

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Man Looking at Charts on his Smartphone

Second Quarter Market Update

The second quarter was full of ups and downs for stocks as investors had plenty to worry about. Throughout the quarter, the trade war between the United States and China ebbed and flowed as news continuously changed from positive to negative. Employment was steady and the unemployment rate remained low, but wage growth was moderate at best. Manufacturing and industrial production hit a snag during the second quarter, as did business fixed investment.

April saw stocks post solid returns as each of the benchmark indexes listed here enjoyed gains of at least 2.5%. The yield on 10-year Treasuries increased by 10 basis points as prices fell. A solid start to corporate earnings season helped support stocks, as did low interest rates and weak consumer price pressures. The March labor report helped quell investors’ fears, as almost 200,000 new jobs were added. As to the major indexes listed here, the Nasdaq led the way, gaining over 4.7%, followed by the S&P 500, which closed the month up by almost 4.0%. The small caps of the Russell 2000 and the Global Dow each rose by nearly 3.3%. The Dow, while pulling up the rear, still gained over 2.5% by the end of April.

Unfortunately, the gains of April were lost in May as stocks fell sharply, closing out their worst month since last December. Encouraging rhetoric at the end of April that a trade deal could be reached between the United States and China was quickly replaced in early May with the imposition of new tariffs on U.S. imports from China. Retaliatory tariffs on U.S. exports entering China soon followed. The Nasdaq and Russell 2000 fell almost 8.0% in May, while the S&P 500, Dow, and Global Dow each dropped by more than 6.5%. Money moved from stocks to bonds, driving prices higher and yields lower. The yield on 10-year Treasuries sank 37 basis points to close May at 2.13%. Crude oil prices, which had exceeded $60 per barrel in April, plummeted by almost $10 per barrel by the end of May.

Stocks rebounded during the middle of June and soared by the end of the month. The tech-heavy Nasdaq led the monthly gains, reaching almost 7.5%, followed by the Dow, which also gained over 7.0% for the month. The Fed’s decision to hold interest rates helped drive investors to stocks. Still, investors sought long-term bonds, driving prices higher and yields lower.

Ultimately, stocks posted solid gains by the end of the second quarter. Each of the benchmark indexes listed here closed the quarter with gains, although not close to the double-digit returns earned at the end of the first quarter. Low inflation, the trade war between China and the United States, and news that the Fed is considering lowering interest rates helped quell investors’ concerns. The large caps of the S&P 500 led the way at the end of the second quarter, gaining 3.79%, followed closely by the tech stocks of the Nasdaq, the Dow, the Global Dow, and the small caps of the Russell 2000, which eked out a quarterly gain of 1.74%. By the close of trading on June 28, the price of crude oil (WTI) was $58.16 per barrel, up from the May 31 price of $53.33 per barrel. The national average retail regular gasoline price was $2.654 per gallon on June 24, down from the May 27 selling price of $2.822 and $0.179 lower than a year ago. The price of gold soared by the end of June, rising to $1,413.30 by close of business on the 28th, up from $1,310.30 at the end of May.

2018 Close
As of June 28
Monthly Change
Quarterly Change
YTD Change
S&P 500
Russell 2000
Global Dow
Fed. Funds
0 bps
0 bps
0 bps
10-year Treasuries
-13 bps
-40 bps
-68 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Latest Economic Reports

  • Employment: Total employment edged up 75,000 in May after adding 224,000 (revised) new jobs in April. The average monthly job gain in 2019 was 164,000 per month (223,000 in 2018). Notable employment increases for May occurred in professional and business services (33,000) and health care (16,000). The unemployment rate remained at 3.6% in May after falling 0.2 percentage point in April. The number of unemployed persons was little changed at 5.9 million. The labor participation rate was 62.8% and the employment-population ratio was 60.6% — both unchanged in May. The average workweek was unchanged at 34.4 hours for May. Average hourly earnings increased by $0.06 to $27.83. Over the last 12 months ended in May, average hourly earnings have risen 3.1%.
  • FOMC/interest rates: As expected, the Federal Open Market Committee did not change interest rates following its latest meeting in June. Lack of price inflation and slowing economic growth underscored the Committee’s reluctance to raise rates. In fact, there is a growing sentiment among Committee members to lower rates in the near future, as projections released by the FOMC in June show the federal funds rate range at between 1.9% and 2.4% by the end of 2019.
  • GDP/budget: The third and final estimate of the first-quarter gross domestic product showed the economy grew at an annualized rate of 3.1%. The GDP expanded at a rate of 2.2% for the fourth quarter of 2018. Driving the growth rate increase was an upturn in nonresidential (business) fixed investment, state and local government spending, and exports, coupled with a smaller decrease in residential investment. These movements were partly offset by decelerations in consumer spending (0.9% in the first quarter compared to 2.5% in the fourth quarter). The federal budget deficit was $207.8 billion in May after enjoying a surplus of $160.3 billion in April ($146.8 billion in May 2018). Through the first eight months of the fiscal year, the government deficit sits at $738.6 billion. Over the same period for fiscal year 2018, the deficit was $532.2 billion.
  • Inflation/consumer spending: Inflationary pressures remain weak as consumer prices are up 1.5% over the last 12 months ended in May. Consumer prices excluding food and energy are up 1.6% over the same 12-month period. For the month, consumer prices rose 0.2% over April, when prices increased 0.3%. In May, consumer spending rose 0.4% (0.6% in April). Personal income and disposable (after-tax) personal income climbed 0.5% in May, respectively, matching the same increases as in April.
  • The Consumer Price Index increased 0.1% in May after rising 0.3% in April and 0.4% in March. Over the 12 months ended in May, the CPI rose 1.8%. The food index rose 0.3% in May after declining in April, with the food index accounting for nearly half of the May CPI monthly increase. The energy index fell 0.6% in May, with the gasoline index falling 0.5%. Core prices, less food and energy, also inched up 0.1% in May for the fourth consecutive month. Core prices have risen 2.0% over the 12 months ended in May.
  • According to the Producer Price Index, the prices companies received for goods and services rose 0.1% in May after climbing 0.2% in April. The index increased 1.8% for the 12 months ended in May. The index less foods, energy, and trade services moved up 0.4% in May, the same increase as in April, and has increased 2.3% over the last 12 months.
  • Housing: Activity in the housing market can be described as erratic at best. Existing home sales rose 2.5% in May after registering no change in April from the prior month. Year-over-year, existing home sales remain down 1.1% (4.4% for the 12 months ended in April). Existing home prices continue to rise, as the May median price for existing homes was $277,700, up from $267,300 the prior month. Existing home prices were up 4.8% from May 2018. Total housing inventory for existing homes for sale in May increased to 1.92 million, up from 1.83 million existing homes available for sale in April and 2.7% ahead of sales a year ago. Sales of new single-family houses fell a whopping 7.8% in May following an April dip of 3.8% (revised). New home sales are now 3.7% below their May 2018 estimate. The median sales price of new houses sold in May was $308,000 ($342,200 in April). The average sales price was $377,200 ($393,700 in April). Inventory at the end of May was at a supply of 6.4 months (5.9 months in April).
  • Manufacturing: According to the Federal Reserve, industrial production rebounded in May, rising 0.4%, after falling 0.4% in April. In May, the indexes for manufacturing and mining gained 0.2% and 0.1%, respectively, while the index for utilities climbed 2.1%. Total industrial production was 2.0% higher in May than it was a year earlier. After showing signs of life during the first quarter, durable goods orders fell 1.3% in May after dropping 2.8% (revised) in April. New orders for transportation equipment drove the decrease, plummeting 4.6% for the month.
  • Imports and exports: In another sign that inflationary pressures are weak, import prices fell 0.3% in May after advancing 0.1% in April. This is the first monthly decline since a 1.4% decline in December. Import fuel prices declined 1.0% in May, after rising 25.4% over the previous four months. Nonfuel import prices were also down, falling 0.3% in May. Year-to-date, import prices are down 1.5% — the largest year-over-year decline since August 2016. Prices for exports dropped 0.2% in May following a 0.1% bump in April. Export prices have fallen 0.7% since May 2018. The latest information on international trade in goods and services, out June 6, is for April and shows that the goods and services deficit was $50.8 billion, down from the $51.9 billion deficit in March. April exports were $206.8 billion, $4.6 billion less than March exports. April imports were $257.6 billion, $5.7 billion less than March imports. Year-to-date, the goods and services deficit increased $4.1 billion, or 2.0%, from the same period in 2018. Exports increased $8.3 billion, or 1.0%. Imports increased $12.4 billion, or 1.2%. The advance report on international trade in goods (excluding services) revealed the trade deficit to be $74.5 billion in May, up from the $70.6 billion deficit in April. Goods exports in May were $4.1 billion more than the prior month, while imports of goods were $7.8 billion more than April’s goods imports.
  • International markets: Escalating tensions between the United States and Iran have added to the already nervous world economy. In response to another round of tariffs imposed by the United States, China is lowering tariffs on imports it receives from other countries, while raising duties on imports received from America. The United Kingdom’s gross domestic product fell sharply in April, down 0.4%, which marks the steepest drop since March 2016.
  • Consumer confidence: The Conference Board Consumer Confidence Index® fell to 121.5 in June, down from May’s index of 131.3. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — decreased from 170.7 to 162.6. The Expectations Index — based on consumers’ short-term outlook for income, business and labor market conditions — decreased from 105.0 last month to 94.1 in June.

Eye on the Month Ahead

The third quarter of the year will likely bring much of the same tumult as was found in the second quarter. Employment should remain strong, although wage growth has been relatively slow. It is worth noting that the Federal Open Market Committee has scaled back its views on economic growth and inflationary trends. In response, interest rates are not likely to increase in the foreseeable future and actually may be reduced. In any case, it appears that the ongoing trade war with China, coupled with tensions between the United States and Iran, will continue to impact the world economy and the U.S. stock market.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.


The Charles Bridge in Prague

Should You Invest Internationally?

Investing in foreign stocks provides access to a world of opportunities outside the United States, which may help boost returns and manage risk in your portfolio. However, it’s important to understand the unique risk/return characteristics of foreign investments before sending a portion of your money overseas.

Reasons to Go Abroad

Here are some of the potential benefits of international investing.

Additional diversification. Other countries may be at a different stage in the business cycle than the U.S. economy. They could recover more quickly (or more slowly) from a recession.

Long-term growth potential. Some of the world’s most rapidly growing economies are located in emerging markets that may be reaping the benefits of new technologies, a growing consumer base, or natural resources that are in high demand.

Possible hedge against a weaker dollar. The U.S. dollar has been strong in recent years, but having some investments denominated in foreign currencies may help offset (or even take advantage of) any future dips in its value.

Reasons to Proceed with Caution

Here are just some of the potential risks.

Politics and economic policies. A nation’s political structure, leadership, and regulations may affect the government’s influence on the economy and the financial markets.

Currency exchange. Just as a weak U.S. dollar could work for you, additional strengthening in the dollar could work against you. That’s because any investment gains and principal denominated in a foreign currency may lose value when exchanged back.

Financial reporting. Many developing countries do not follow rigorous U.S. accounting standards, which often makes it more difficult to have a true picture of company and industry performance.

Risk/Return Potential

Some international investments may offer the chance for greater returns, but as with other investments, stronger potential comes with a greater level of risk. For example, over the past 30 years, foreign stocks have outperformed U.S. stocks, bonds, and cash alternatives 11 times. However, they have also underperformed 11 times, tying cash for the highest number of lowest-performing years during the same time period.

Number of highest-performing years,


Cash 4
U.S. Stocks10
Foreign stocks11


Number of lowest-performing years,


Cash 11
U.S. Stocks2
Foreign stocks11

If you decide to spread some of your investment dollars around the world, be prepared to hold tight during bouts of market volatility. And remember to rebalance your portfolio periodically to help align your asset allocation with your long-term investment strategy.

Performance is from January 1, 1989, to December 31, 2018. Cash is represented by the Citigroup 3-month Treasury Bill Index. Bonds are represented by the Citigroup Corporate Bond Composite Index. U.S. stocks are represented by the S&P 500 Composite Price Index. Foreign stocks are represented by the MSCI EAFE Price Index. All indexes are unmanaged, accurate reflections of the performance of the asset classes shown. Returns reflect past performance, which does not indicate future results. Taxes, fees, brokerage commissions, and other expenses are not reflected. Investors cannot invest directly in any index.If you decide to spread some of your investment dollars around the world, be prepared to hold tight during bouts of market volatility. And remember to rebalance your portfolio periodically to help align your asset allocation with your long-term investment strategy.
The principal value of cash alternatives may fluctuate with market conditions. Cash alternatives are subject to liquidity and credit risks. It is possible to lose money with this type of investment. The return and principal value of stocks may fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest, whereas corporate bonds are not. The principal value of bonds may fluctuate with market conditions. Bonds are subject to inflation, interest rate, and credit risks. Bonds redeemed prior to maturity may be worth more or less than their original cost. Diversification is a strategy used to help manage investment risk; it does not guarantee a profit or protect against investment loss.


Woman Typing on Computer

How Does Your Employer’s Retirement Plan Compare?

Each year, the Plan Sponsor Council of America (PSCA) surveys employers to gauge trends in retirement plan features and participation. Results are used by employers and plan participants to benchmark their plans against overall averages. How does your plan compare to the most recent survey results, released at the end of 2018?1

Participation and Savings Rates

Plan participation (that is, the percentage of participants contributing to the plan) was on the rise, increasing from 77% in 2010 to 85% in 2017. Employees in the financial, insurance and real estate, manufacturing, and technology and telecommunications sectors were most likely to contribute (more than 85% of eligible employees), while those in the transportation, utility, and energy sectors (75.6%) and wholesale distribution and retail trade sectors (59.7%) were least likely.

The average amount participants contributed to their plans rose from 6.2% of salary in 2010 to 7.1% in 2017. Participants in the health-care sector contributed the most (8.7%), while those in durable goods manufacturing contributed the least (6.3%).

Roth Option on the Rise

Roth contributions are growing in popularity among 401(k) plans. Unlike traditional pre-tax contributions that are deducted from a paycheck before income taxes are assessed, Roth contributions are made in after-tax dollars. The primary benefit is that “qualified” withdrawals from a Roth account are tax-free. A withdrawal is qualified if the account has been held for at least five years and it has been made after the participant reaches age 59½, dies, or becomes disabled.

The percentage of plans allowing participants to make Roth contributions rose from 45.5% in 2010 to nearly 70% in 2017. Almost 20% of eligible employees made Roth contributions.

Company Contributions

Nearly all employers surveyed contributed to their employees’ plans through matching contributions, non-matching contributions, or a combination of both. And it appears that employers have become more generous over time, as the average company contribution rose from 3.5% in 2010 to 5.1% in 2017. Moreover, many employers impose a vesting schedule on their contributions through which plan participants earn the right to keep the company contributions over time. In 2017, less than 40% of companies allowed their employees to become immediately vested in the company contributions.

Investment Options

When it comes to your retirement plan, how many options would you prefer on your investment menu? Too few funds could limit the opportunity for an appropriate level of diversification, while too many funds might cause an overwhelming decision-making process. So what’s the “right” number?

According to an article in InvestmentNews, an appropriate number of investment options (typically mutual funds) is 15 to 20.2 And according to the PSCA, employers seem to be following this guideline, as the average number of funds offered among survey respondents was 20.

The most common types of funds offered were indexed domestic equity funds (84.6% of plans), followed by actively managed domestic equity funds (83.6%), actively managed domestic bond funds (78.9%), and actively managed international/global equity funds (77.9%). Target-date funds — those that offer a diversified mix of different types of investments based on a participant’s target retirement date — were offered in 70.6% of plans.

Overall, the two most popular types of funds, based on percentage of assets invested, were target-date funds and actively managed domestic equity funds.3

1PSCA, 61st Annual Survey
2 InvestmentNews, February 16, 2018
3The return and principal value of mutual funds fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost. A bond fund is a mutual fund that comprises mostly bonds and other debt instruments. The mix of bonds depends on each fund’s focus and stated objectives. Bond funds are subject to the same inflation, interest rate, and credit risks as their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country; this may result in greater share price volatility. The target date is the approximate date when an investor plans to withdraw money. The mix of investments in the target-date fund becomes more conservative as the date grows closer. The further away the date, the greater the risks the fund usually takes. The principal value is not guaranteed at any time, including on or after the target date. There is no guarantee that a target-date fund will meet its stated objectives. It is important to note that no two target-date funds with the same target date are alike. Typically, they won’t have the same asset allocation, investment holdings, turnover rate, or glide path.


*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared for Salal Investment Services by Broadridge Investor Communication Solutions, Inc. Copyright 2019.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of WA, OR, OH, IA and CA. No offers may be made or accepted from any resident outside the specific states referenced.