Investment Update – Q1

Shanele Stoll Market Update

2018 – Recap

At the beginning of last year (2018), we compared the market in 2017 similar to the climb to the top of a rollercoaster. People were excited, it was a slow and steady climb, and there was not much in the way of surprises. We all have been on a roller coaster, and we know what had to happen next. The markets in 2018 were filled with steep declines and subsequent recoveries. Investors were nervous about what was coming next. The fact of the matter is the volatility in 2018 was just a return to normality. But, it felt so distressing to investors because 2017 was a super smooth ride.

The S&P 500 was up or down more than 1% nine times in December alone, compared to eight times in all of 2017. It moved more than 1% 64 times during the year. In an average year, the S&P 500 moves by 1% or more on 52 days. 2018 wasn’t all bad. The S&P 500 set an all-time record on September 20, and the Dow closed at its record on October 3. The Dow also closed more than 1,000 points higher on December 26 — the first time it ever accomplished that feat.

We know prices can only go in one direction for so long. We think the correction in the market last year will actually serve as beneficial. It shook things up, it got nervous investors out of the market and opportunist who were on the side lines back in the game. It created some real opportunities for investors to buy good, long-term investments at steep discounts. We are currently managing this for our client portfolios and evaluating if any additional changes are needed to begin the year. There was an abnormal amount of trading in client accounts last year, mostly due to tax-loss harvesting and trying to take advantage of a losing investment when the markets were going through a weak period.

Here is a summary of various market returns for 2018:

Equities Level 2018
S&P 500 2486 -5.20 %
Dow Jones 30 23062 -4.58 %
Russell 2000 3325 -11.72 %
Russell 1000 Growth 860.90 -2.46 %
Russell 1000 Value 670.14 -8.99 %
MSCI EAFE 1712 -13.74 %
MSCI EM 962.63 -14.52 %
NASDAQ 6585 -3.59 %
Fixed Income Yield 2018
U.S. Aggregate 3.32 -0.23 %
U.S. Corporates 4.24 -2.75 %
Municipals (10yr) 2.54 1.38 %
High Yield 8.02 -2.23 %

 

2019 – Outlook

We are cautiously optimistic that the markets will recover this year and do not believe we are at the beginning stages of a bear market. Fundamentals of the economy are still strong and continue to head in the right direction. The U.S. economy added 312,000 jobs during the month of December, which is the second highest reading over the past 30 months and well above the 200,000 average gains since the jobs recovery began in 2010. Average hourly earnings continued to creep higher, rising 3.2% year over year. These were the strongest yearly wage gains since 2009, and we believe this will continue with a tightening labor market. GDP (Gross Domestic Product) was +3.4% for Q3 2018 and while we are still waiting for Q4 figures, this is a positive sign for the overall U.S. economy.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

Economy

  • Fed policy decisions will remain data dependent, meaning how the incoming information affects the outlook for growth and inflation.
  • Trade policy will be a major uncertainty in early 2019. Tariffs on Chinese goods were set to expand at the start of the year, but that has been postponed allowing more time for negotiations. This is a positive sign that they are still negotiating.
  • We could see an inversion of the yield curve in 2019, which has historically signaled that a recession is on the way. Some economists, and even a few Fed officials, have suggested that “this time is different.”
  • The transition to a slower, more sustainable pace of growth may be a challenge for investors, as such transitions are rarely smooth. However, the economic expansion should continue.

Equities

  • We have a positive bias to equities over the next 12 months and believe the current pullback is overdone for the short-term.
  • Trade negotiations are expected to remain the center of investor focus in 2019. With the stakes (to global sentiment) high, we are optimistic both sides can arrive at acceptable terms as the year progresses.
  • If the U.S. and China eventually work out trade differences and the U.S. economy remains healthy (two outcomes we expect), improving investor sentiment and solid earnings will allow equities to post healthy gains by the end of 2019.

International

  • The Chinese economy should continue to experience decent economic growth rates in 2019, especially if they bend with the wind on the trade front.
  • Corporate earnings growth in Europe, as a region, looks relatively strong versus the United States using current estimates for 2019, and this has not been the case for some time.
  • Emerging markets appear to be in the strongest position to spring a positive surprise in 2019 relative to other non-U.S. assets.
  • As long as the global trade talks stay on track, the outlook for markets outside the United States for 2019 looks a lot better than it currently feels.

Fixed income

  • Muted fiscal stimulus, a widening government deficit, and softening monetary policy suggest that interest rates will not make any dramatic moves upward. We expect the Fed to have 1-2 interest rate increases this year.
  • 2019 will likely see a continuation of the push-and-pull dynamic that has kept interest rates in a narrow trading range.
  • The steeper municipal and corporate yield curve may provide investors more attractive options than Treasury bonds.

Bottom line

  • Depending on their individual situation, investors should continue to adhere to their long-term strategic asset allocation as we move into 2019, particularly as they pertain to equity and fixed income positioning. Changes in spending needs will likely drive changes to your asset allocation targets.
  • While the economy and company earnings are expected to decelerate from the exceptional levels seen throughout 2018, the U.S. is still poised for growth.
  • Exchange rates are typically a wild card. If the dollar appreciates in 2019, non-U.S. investments will have a more difficult time outperforming their domestic counterparts.
  • We expect volatility to be a centerpiece in the market narrative. However, volatility remains the pre-requisite for opportunity and, to that end, we look forward to evaluating the opportunities and tradeoffs as they continue to improve.

Please let us know if you have any questions about recent market events or how to position your long-term financial plan for the months and years ahead.

Warm Regards,

Jerrod Ferguson & Vance Wealth Investment Committee

Sources:

1 – Raymond James: Investment Strategy Quarterly, Volume 11, Issue 1, January 2019

2 – https://www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html