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HFG Trust White Paper Series The Federal Reserve is Getting Closer to the End of Raising Rates
The FOMC (Federal Reserve) approved to raise short-term interest rates by 25 basis points or .25% from 2.25%
to 2.50%. The chart below illustrates US Treasury rates as of the close of 12/18/18 (blue), one day prior to the
announced rate increase, compared to the peak this year in the 10-year Treasury rate on 11/8/18 (yellow).
The announcement of the increase did not come as a surprise. The markets already priced in the increase in
anticipation of the announcement. What has changed is the likely tone of future rate increases moving forward.
The official statement from the Fed in prior meetings was “further gradual increases” were to be expected. It has
now softened to “some further gradual increases” as the President and economists hold their stance that rates
should remain unchanged until it can be determined the global economy could withstand the rate increase.
What you are probably asking yourself is, “what does this mean to my portfolio?” For stocks, the change in
short-term rates has a nominal effect on global equities. If anything, it could provide an incentive for investors to
stay in an overpriced stock market longer than rational thinking would suggest. As for bonds, while the change in
rates can moderately decrease the value of shorter-term bond strategies, it is more likely to affect longer-term
strategies of 10-30 years. This is simply because long-term debt typically mean increased risk (default probability,
credit worthiness, and interest rate changes) and so when rates increase, these issues will fall in price more
aggressively than short-term debt. At HFG we are mindful of this rising interest rate environment, thus our
strategies do not emphasize long term bond strategies. In summary, the increase in short term rates mutes
returns in the short run, however, it prepares the bond portfolio for higher returns going forward. Gradual rate
increases are a good thing for shorter term bond strategies.
2.35 2.392.53 2.64 2.65 2.64 2.65 2.74 2.82
2.96 3.07
2.212.35
2.522.74
2.98 3.05 3.09 3.17 3.24 3.36 3.43
1 MO 3 MO 6 MO 1 YR 2 YR 3 YR 5 YR 7 YR 10 YR 20 YR 30 YR
US Treasury Rates
12/18/2018 11/8/2018
Global Stock Markets – Yes, it is a correction!Global stock markets have declined 10-20% since 9/30/18 as shown by the blue bar chart below. Since 1968,
according to Yardeni Research, there have been 29 10% corrections in US stocks, making this the 30th correction
over the last 50 years. This comes to a correction about every 20 months. Thus, we shouldn’t be surprised by
corrections. They are a normal occurrence in financial markets.
The chart in yellow illustrates the year-to-date returns for all global stocks as of 12/19/18. The two bars to the far right
are Emerging Markets and International Developed Markets. The return difference between a total International
allocation and a diversified US strategy can largely be explained by the change in currency. The US dollar has
strengthened by 5-6% against global currencies, which makes owning international assets worth that much less.
HFG Trust White Paper Ty Haberling, CFP®
-12.48%
Global Equity Returns
YTD 12/19/18
MSCI ACWI IDX RUSSELL 1000
GROWTH INDEX RUSSELL 1000 VALUE INDEX
RUSSELL 2000 GROWTH
RUSSELL 2000 VALUE MSCI EMERGING
MSCI ACW EX USA IMI IDX
-9.34%
-2.04%
-8.32%-9.78%
-12.55%
-16.55%
-14.43%
Global Equity Returns
Global Equity Returns 9/30/18 to 12/19/18
-13.75%-16.44%
-12.25%
-22.20%
-18.73%
-10.32%
MSCI ACWI IDX RUSSELL 1000
GROWTH INDEX RUSSELL 1000 VALUE INDEX
RUSSELL 2000 GROWTH
RUSSELL 2000 VALUE MSCI EMERGING
MSCI ACW EX USA IMI IDX
-12.48%
What does the global equity decline mean to me and my strategy? If you are retired and dependent on your portfolio for cash flow, our strategy has always followed the concept
of “building arks, not predicting rain.” Your portfolio should have an allocation to bonds that provides a safety
bucket for 7-12 years of cash flow needs. We believe a “time cushion” of 7-12 years is a reasonable time period
to allow the rest of your portfolio to recover from any stock declines that may occur. If you are uncertain how
your allocation fits into your cash flow needs, I encourage you to review your plan with your HFG Trust advisor.
If you are still working, our message has been the same for 35 years. You have a plan that is built for
turbulence. Don’t change your plan because of fear. Remember, we’ve been through Black Monday in 1987,
we’ve traversed the tech bubble of 2000, and we helped clients survive the Great Recession of 2008. We build
portfolios expecting these events, though we cannot forecast when they might happen. As prices drop, you
are benefiting from your monthly 401k contributions because you are buying stocks at cheaper prices.
Remember, when prices are down, you buy more shares with the same contribution. It is like going shopping
on Black Friday or Cyber Monday and you are the only shopper there. Thus, do not change your 401k
purchase strategy during turbulent times.
This letter is not a substitute for the deeper conversations you have with your HFG Trust Advisor; however, in
light of recent volatility, we think it is important to remind our clients to follow their plan. Your plan is a
combination of time horizon management and global diversification. In a future letter we will illustrate why we
think a globally diversified strategy is safer than placing all of your capital in US stocks. Time horizon
management is the concept that you have two buckets of wealth, one is for capital preservation (short-term
bonds) and the other is for growth (global equities). Make sure your risk allocation aligns with your long-term
goals. It is the most impactful and fundamental driver of how you portfolio performs.
In closing, we thank you for your trust and confidence and encourage you to enjoy the Holiday Season with
your family and friends.
CEO, HFG Trust
HFG Trust White Paper Ty Haberling, CFP®
509.735.7507 hfgtrust.com Your Financial Partner for Life
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