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Fourth Quarter 2018

The Markets

The last quarter of 2018 ended on a negative note with December being particularly volatile. In fact, it was the worst December since 1931. After a surprisingly strong 2017, 2018 began on a positive note, experienced a 10% correction in February and then went on to hit new highs in September. The fourth quarter however turned out to be a much more volatile period. This left 2018 with negative categories for every asset class – the first time I can remember that happening in quite a long time. U.S and international stocks were down, as well as commodities, gold and real estate. The bright spots were high- quality, short-term bonds (like treasuries and cash) which were up by 1 or 2% for the year.

During the fourth quarter, there was escalated news about tariffs and trade, as well as a projected deceleration in earnings for 2019. This was highlighted by the recent announcement by Apple of slower sales in China. Also, the Federal Reserve raised interest rates because the employment numbers and economic growth numbers continued to be strong. The market had a negative reaction to that announcement, as well. It is important to note that lower earnings forecast is not forecasting losses – just slower growth rates ahead. That is not unexpected and quite typical in mature business cycles. However, Apple’s announcement was an indicator that global growth is slowing, and recession is possible.

We have often noted that technology companies (i.e. Apple, Amazon, Netflix, Google) were becoming expensive. As index investing grew, the weight of those companies during a selloff could bring markets lower more quickly and have a much bigger impact on the S&P 500. As a reminder, the S&P 500 is an index of 500 companies which are weighted by the company value – it is not equally weighted. Larger companies will impact indices much more. The correction from the high to the low in 2018 was just under 20%. A twenty percent decline is the definition of a bear market and the S&P did not get there. Many of the individual stocks in the S&P 500 have corrected more than 20%, but the index as a whole has not. Small company stocks have been hit very hard as have international indices. Since the pullback, the overall valuation of the market is more aligned with historical averages versus being higher than the averages at the end of 2017. Bonds did hold their own, but since short-term rates are rising, they have not provided as much uptick as we’ve had in past corrections. Energy prices have fallen, and housing sales have slowed - all indicators of an economy that is starting to slow.

Looking Forward

The markets seemed to be focused on three main themes: growth rates in the economy, the Fed and direction of interest rates, and trade. All can be interrelated. After increasing rates in 2018, the Fed has signaled that further increases are not a given. This seems to have calmed markets a bit. Significantly higher interest rates, while the economy is slowing, could cause more uncertainty and that overshoot would probably have a negative impact. Of course, an agreement or progress with China regarding world trade and elimination of tariffs would be a positive. No progress, or further stalemate would be a negative. Brexit will likely have an impact as well on international markets and beyond. Remember that international and emerging markets were the leading asset classes in 2017 and some of the worst in 2018.

In summary, our economy is projected to grow at about a 2% rate this year. Unemployment is still low and job growth is very strong which are positives overall. In general, stock valuations are less overpriced than they were at the end of 2017. In particular, emerging markets are very cheap relative to their average historical valuations. Cash and bonds still provide some income and many companies do have solid balance sheets, good cash flows and pay dividends.

What we expect for 2019 is continued volatility. Earnings are still expected to grow. The macro environment remains solid and the U.S economy appears stable, albeit somewhat slower. Valuations for stocks are more aligned with averages. Low oil prices may be a positive for consumers. So far, the U.S. leading economic indicators remain positive. Some potential negatives would be tensions with China continuing to ramp up, tariffs being implemented, a slowdown in earnings, a Central Bank or monetary policy error with the Fed tightening too rapidly and a Brexit hard landing where disruption occurs with international and emerging markets.

Essentially, the markets have given back the gains at the end of 2017. The S&P 500 is about where it was at the end of September 2017. At that time, most of us were pretty happy with our portfolios as they had hit all time highs and had extended their gains from the lows of the last recession. As interest rates continue to slowly inch up, we are hopeful that the bond market can stabilize. While slower growth and a potential recession is not good news for stocks, well-balanced diversified portfolios can still take advantage of opportunities and mitigate extreme swings during uncertain periods.

Happenings at SWMG

Within the practice, two members of our team have accomplished significant milestones in their careers. Jill Carr completed coursework for and passed the exam to become a Certified Financial Planner CFP®. Jill adds this certification to her current distinction as a Certified Public Accountant, CPA. Jennie Bauder, who many of you know as a Client Service Representative, completed her Masters in Business Administration, (MBA) at the end of 2018. Congratulations to both Jill and Jennie. We are also excited to share that Chandler Fish, our Receptionist and jack of all trades, will be leaving us for a short time beginning in late January as she prepares to have her first child.

In reflecting on 2018, we remain confident that our process can help you achieve your personal and financial goals despite the many challenges we face with financial markets, the economy and changes in personal circumstances. A recent wonderful, heartfelt thank you letter from a client whose family we have been working with for over 40 years, reinforced that. Knowing we can make a positive, meaningful difference in our clients’ lives, across generations, is what we are about.

Thank you for your confidence and our continued association. To good health and a happy 2019.

Best Regards,

Sherri

 

Financial Market Update* Year-to-date change as of December 31, 2018
S&P 500 Index 4.38%
Morningstar Commodities
Broad Basket Category 11.52%
MSCI EAFE US$ (International) 13.79%
Barclay US Aggregate Bond 0.01%

Source: Morningstar
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Morningstar Commodities Broad Basket Category is a composite of returns of all funds in this category. The MSCI EAFE is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The Barclays US Aggregate Index is an unmanaged market value weighted performance benchmark for investment- grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year.

*Past performance may not be indicative of future results. Expressions of opinions are as of this date and are subject to change without notice. Any opinions are those of Sherri Stephens and not necessarily those of RJFS or Raymond James. Stephens Wealth Management Group is not a registered broker/dealer and is independent of RJFS.

Diversification and asset allocation do not ensure a profit or guarantee against a loss. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. You should discuss any tax or legal matters with the appropriate professional.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.

Managed futures involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. You should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. You should only invest in hedge funds, managed futures or other similar strategies if you do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

Stephens Wealth Management Group and Pearl Planning are not a registered broker/dealer and is independent of Raymond James Financial Services.

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