October 2019
By Darren Nyce, CFA
Senior Research Analyst, Castle Investment Advisors®, LLC


“I suffer from short-term memory loss. It runs in my family… At least I think it does…hmm. Where are they?” Dory, Finding Nemo.

In the animated movie, “Finding Nemo” the sunny, optimistic, blue tang fish named Dory assists the protagonist Marlin on his journey to rescue his son Nemo. The comedy and tragedy of Dory’s personality is that she suffers from short-term memory loss and is constantly being attracted to and distracted by anything new, to the detriment of her larger quest.

The markets performed their own Dory impersonation this past quarter as each new headline brought a new reaction and often over-reaction.

  • Earnings season shows better than expected – market surges
  • Global manufacturing slows – is this the beginning of the end
  • The Fed cuts interest rates, twice – woo-hoo
  • More tariffs on more Chinese goods announced – market sells off sharply
  • Tariffs will be delayed – market rises
  • China allows its currency to drop, decides to stop buying American crops – down some more
  • U.S. will restrict Chinese companies from our stock exchanges – more selling
  • U.S. isn’t really considering restricting Chinese companies from our stock exchanges – market rallies
  • Yield curve inverts – recession must be coming
  • Leading indicators do not indicate recession – market cheers
  • CEO confidence survey indicates pessimism – better get out
  • Consumer confidence remains strong – better get back in
  • U.S. manufacturing report shows weakness – things are about to get bad
  • Service sector and employment situation remains solid – things are still pretty good
  • Congress announces an impeachment inquiry – market drops

With all these gyrations, the S&P 500, as well as bonds in aggregate, were able to finish the quarter in positive territory, while small cap and international stocks were down slightly. Utilities and Real Estate stocks performed the best while Energy and Health Care were the worst performing sectors.

Index     3rd Qtr 2019      
1 Year
3 Year
5 Year
S&P 500 1.7% 4.3% 13.4% 10.8%
Nasdaq Composite 0.2% 0.5% 15.9% 13.5%
Russell 2000 – Smaller Companies -2.4% -8.9% 8.2% 8.2%
MSCI EAFE – International -1.1% -1.3% 6.5% 3.3%
Barclays US Aggregate Bond 2.3% 10.3% 2.9% 3.4%

The challenge for investors is to put all the market moving elements into their proper perspective. It is better for both our emotional health and our financial health to keep our focus on the big picture and not obsess over the latest headline that might be retracted tomorrow. At Castle, we build portfolios designed to accomplish the long-term goals for each client. This does not give us a pass from paying attention to news events, economic data, or market reactions; but we analyze these items through the lens of their impact on years and not days.

Annual parade

The community where I live in Zionsville hosts a Fall Festival Parade every September. In viewing aerial footage of this year’s event, I was struck by the dynamic perspective you get from a drone than from my ground level view at the second shade tree north of the jewelry shop. At street level, you focus on each individual element of the parade, which sometimes stops completely so that a band can play, cheerleaders can display their spirit, or the Tesla club can show off their features. But from up above, you get a much more wholistic view that is less focused on any individual float and more on the fact that the parade is making its way from the High School to the end of Main Street (Photo to the left courtesy of the Zionsville Times Sentinel).

Your personal “financial parade” will also have plenty of stops and starts along the way; it doesn’t always travel at the same speed, nor does it follow a necessarily straight path. But the journey should follow a plan that is taking you from where you are to where you want to be, and part of that plan is leaving room for thoughtful adjustments (this is different than knee-jerk reactions).

The chart below gives us another reminder of why a drone’s eye view is valuable. Bull markets have historically lasted longer and provided greater upside to the markets compared to the relatively short and historically minor, while in the moment painful, losses.

Bull Market chartpngSource: First Trust Advisors L.P., Bloomberg. Returns from 1926 - 6/28/19

Below are some of the economic data points we appreciate in addition to the historical content depicted ABOVE.

Economic Slowdown

Is the economy slowing? It appears so. There is weakness in industrial production, manufacturing, inventories and exports (see charts below). 

Economy slowing 1    Economy slowing 2    Economy slowing 3    Economy slowing 4
Source: Allianz Global Investors; FactSet; 9/20/19

Are we headed toward a recession? Probably sometime, but it does not seem imminent as we have yet to see signs like large increases in jobless claims, excessive debt levels, or other serious imbalances. The current low interest rate environment is certainly not restraining the economy and we do continue to see overall growth, albeit slow growth. In order for GDP to rise, the number of workers must increase, or productivity of existing workers must increase. The combination of few unemployed people, existing demographics, and a tight immigration policy make it unlikely that we will see a substantial growth in workers. Also, current uncertainty over trade dynamics has reduced the amount of investment spending, which makes it unlikely that we would see significant growth in productivity. The result is that we are expecting a continuation of lower than average economic growth (see chart below).

Real GDP


The unemployment rate has dropped to 3.5%, the lowest it has been since December 1969 (see chart below. Shaded areas indicate recessions).


As the 2020 election process ramps up, we will be watching the various implications. Currently we believe the sectors likely to see the biggest impact are healthcare, technology, and financials. Sweeping changes usually occur when one party controls both chambers of Congress, as well as the White House; the math currently indicates that continued divided government is the most likely scenario.


The S&P 500 is currently on pace to have cumulative earnings per share of $165.16, compared with $161.45 in 2018 (see chart below). With profit margins already quite high, and the potential, if not probability, of a slowing economy, we are tempering our expectations for stock performance for the next few quarters.

As of the end of the quarter, this put the forward P/E at 16.8, just slightly more expensive than the 25-year average of 16.2.

Thanks for letting us be a part of your financial parade. Have a great fall and as you navigate the rest of 2019, remember the wise words of Dory, “Just keep swimming.”


Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.