Customized . Comprehensive. Unique.

February Market Update

From one of the most volatile quarters in the market’s history to one of the best January starts for the markets in history … it appears we are in a history-making time! The factors driving one were responsible for the other and it’s an old refrain: China trade talks, Federal Reserve and interest rates, and of course corporate earnings.

Markets bounced strongly off of the lows from the last quarter, despite earnings season kicking off in sour fashion after Apple’s forward guidance disappointed. The recovery was due in part to a bit of market exhaustion – nothing goes down forever, even though it feels like it sometimes! Mostly the bounce can be attributed to the press conference held by Chairman Powell of the Federal Reserve, following their first meeting of the year. At their December meeting, Chairman Powell indicated very little reason to diverge from the path they had been on all year of raising interest rates, and his tone gave little concern to a slowing economy. It was from that point that December turned brutal.

Six weeks and a few news cycles later, his tone was decidedly more conciliatory as he once again addressed the financial press and appeared to not only walk back his December comments, but indicate that the Federal Reserve would be “patient” with any further increases in interest rates. Some have taken this to mean no further rate increases this year, which we think unlikely, but it is helpful for stocks and bonds alike that we do appear to be taking a breath. This has fueled stock market gains and allowed for the strong showing in January.

More importantly for our bond portfolios, we have re-entered high yield bonds in a big way after staying out for most of last year. If the Feds can stay out of our pockets for awhile and oil prices stabilize or improve (the high yield market has a strong correlation to oil prices), we can enjoy the 6% and 7% yields we haven’t seen for a few years! This allows us to temper the volatility to the stock portion of your portfolios as well. And we do think the volatility will continue.

Talks with China on changes to our trade agreements are ongoing, as they have been for almost a year now. We will spend more time on the whole question of the trade agreements for March, but it’s clear that every semblance of progress fuels good days in the market, and every headline of delays does just the opposite. Volatility.

And then there is the political news cycle. We are seeing the first of many, many hats that will be thrown in the ring and the rhetoric will only rise in volume as the year goes on and we get closer to Election Year. Toss in a wall and a second potential government shut down, not to mention the economic damage done by the first one, and political issues could be the biggest factor contributing to volatility in 2019.

‘If you are worried when the stock market goes down and happy when it goes up, it probably indicates that your portfolio is unbalanced. If your income is also tied to how the economy does, you are doubly at risk because your portfolio can go down when your income is worst, which is scary.’

- Ray Dalio (very successful hedge fund manager)

Ray’s words echo our own as we meet with you this year to gauge your temperature for the recent volatility and discuss ways to make sure your investments and tolerance for risk find balance in your financial plan.

Balance means having fun, too, and we still have a few tickets left for the spring training game on Tuesday, February 26th! It’s the Cubs vs. the Diamondbacks at Cubby Stadium, so if you’ve been thinking about a day in the sun with a hotdog, we would love to have you join us. Call the office to reserve your tickets and hope we see you there -

January Market Update

A decade of consecutive positive annual returns from the S&P 500 ended in 2018. In the final three months of the year, the S&P 500 registered its worst quarterly performance in seven years and ended 2018 with a negative annual total return for the first time since 2008.

The break down in stocks was driven by a trifecta of classic economic and market concerns emanating from underwhelming corporate earnings guidance, suddenly lackluster economic growth and disappointment towards Federal Reserve monetary policy.

Stocks initially dropped in early October as the third-quarter corporate earnings season disappointed markets. While most companies beat consensus estimates, as they often do, profit warnings from select multinational and industrial firms such as PPG Industries (PPG) and FedEx (FDX) highlighted growing concerns from analysts about peak earnings growth for U.S. corporations. That rising concern was reflected by the market’s performance during the heart of the third-quarter reporting season, as the S&P 500 declined 6.84% in October.

After a respite from selling in November that saw stocks bounce back slightly from the October losses, earnings concerns were compounded in December by suddenly disappointing economic readings. In early December, multiple economic indicators including manufacturing surveys and the November jobs report missed Wall Street consensus estimates, adding the potential of slowing economic growth to the list of headwinds on stocks.

Finally, uncertainty regarding U.S. monetary policy in the wake of the December rate hike by the Federal Reserve added yet another source of concern for investors, and that additional unknown caused a massive spike in market volatility in late December. Specifically, the Fed increased interest rates for the fourth time in 2018, despite the declines in stocks and wavering economic data, and signaled it expects to increase rates two more times in 2019. That policy decision, which was more restrictive than investors were hoping for, caused stocks to plunge as the major equity indexes dropped to fresh 52-week lows during the final two weeks of December. Markets did bounce modestly during the final days of 2018 to finish off the worst levels of the year, but still solidly negative on an annual basis.

While broad US markets were all down for the year, commodities such as oil and gold, suffered greater losses due in part to the continued strength of the dollar for most of the year. A similar fate was suffered by international markets which saw yearly declines of more than 13% for developed international markets and over 14% for emerging markets.

Despite the legitimate concerns about economic growth, earnings and Fed policy, the news in the fourth quarter wasn’t all bad.

First, the U.S. and China agreed to a temporary trade war “truce” and began an intense, 90-day negotiation period aimed at ending the trade war.

Second, the European Union and the Italian government reached a compromise on Italy’s proposed 2019 budget that satisfied European Commission rules, thereby avoiding a political showdown.

Lastly, most major indicators of U.S. economic growth, while exhibiting a loss of momentum, remained in solidly positive territory, meaning the economy is still growing (albeit, potentially at a slower pace). The November Employment Situation Report showed positive jobs growth and an unemployment rate under 4% while regional manufacturing surveys remained in positive territory.

In sum, 2018 was a very difficult year in the markets and for investors. Not only did most major stock indices post a negative full-year total return for the first time since 2008, but the declines came with two episodes of intense, confidence-shaking volatility in the first and fourth quarters. That being said, 2018 was not 2008; this is the perfect time to reflect on risk tolerance and adjust your portfolio accordingly if you found this volatility kept you from sleeping well.

So what are our expectations for 2019?

At a minimum, we can expect continued volatility in stock, bond and commodity markets in the coming months. And, whether the markets continue the fourth-quarter declines or rebound will depend largely on the resolution of those three uncertainties facing markets: Earnings, economic growth and Fed policy.

Regarding earnings, the bulk of the fourth-quarter 2018 earnings results will be released this month, so within the next few weeks we should learn whether U.S. corporate results have stabilized, or whether the disappointing guidance we saw from companies in Q3 continued. Apple certainly did not help the volatility picture, when kicking off earnings season with less than stellar results this week and, most importantly, downgrading their future expectations, citing concerns about the trade tariffs. Yet we have quickly followed a horrible day with a huge positive given the great employment report. Such is the stuff of volatility.

We understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. In your portfolios here, we had several risk-off triggers hit during the prior quarter and given the continued volatility, have not seen the stability we need to see to return to those positions. A measured approach will likely be the solution for this year as we continue to work with you to ensure your investments are in line with the needs of your financial plan.

Welcome to a new year!