First Quarter Market Commentary

Transcription

1 January 2019 First Quarter Market Commentary A December to Remember What a month - the S&P dropped over 9% and small cap stocks as measured by the Russell 2000, fell almost 12%. December 2018 will be remembered as the month that ended the ten-year streak of positive calendar year stock market returns that began in Rising Fed interest rates, quantitative tightening, China, government shutdown and global growth concerns finally overcame equity valuations and resulted in a market that was down 4.4% for the year according to the S&P 500. My late in December corresponded with the recent low in stock market performance and since then it has been on a bit of a rebound, with the S&P 500 up over ten percent through mid-january. On January 4th, two constructive events occurred that supported the market. First, December s job report came in especially strong with over 300k new jobs created and an actual rise in the unemployment rate took place as idle workers reentered the job market. Second, later that morning, Fed Chairman Powell along with former Fed chairpersons Janet Yellen and Ben Bernanke, spoke at a panel discussion and walked back the Fed s hawkish rhetoric from the previous month and implied that they will be much more data dependent in raising rates in 2019 than previously implied. These developments, coupled with some mutual concessions in China trade negotiations and a decent earning s season so far, have helped improve investor optimism. Plenty remains to be worried about however and the month of March seems to be the short-term focal point of these issues. China trade talks have a 90-day deadline ending on March 1 st for an agreement. Also, in March, the debt ceiling limit is scheduled to be reimposed after a temporary suspension and without a deal to open the government before then, the current partial shutdown may assume a larger profile. Finally, we can look forward to government ineptitude of the highest caliber as the United Kingdom most likely will fail to produce a unified, workable Brexit deal with the European Union. College basketball may be a very compelling distraction. A positive development has been a much-needed re-rating of equity valuations as stock prices have fallen while overall earnings growth has continued. According to Ned Davis Research (NDR) analysis, current price to earnings levels on equities in the S&P 500 measured on a trailing twelve months (TTM) basis, are estimated to be around 20 times. This is a five-year low and it represents a major improvement from the richly valued 26 times TTM price to earnings ratio high that we saw back in the early months of Stock prices incorporate earnings, growth, interest rates, and risk perception, and as a result, our view of 2019 market returns is more sanguine than what the month of December would imply. Earnings and growth should hold up as we expect the economy to continue to grow at slightly above trend without a recession in 2019 or Inflation and interest rates will be held in check by subdued commodity prices, increasing worker productivity, a flexible Fed and low International interest rates. We do expect a higher risk premium to be a negative as global politics and China increase volatility and temper risk appetites. However, the net effect of these combined factors we feel will result in a return to positive stock market returns in 2019.

2 First Quarter Market Commentary Page 2 Our thoughts on Asset Allocation: As we navigate the ups and downs of the market, we suggest overweighting and underweighting asset classes like stocks, bonds, cash and alternative assets at times. We also will make tactical recommendations within asset classes themselves as we recommend emphasizing various equity styles like growth versus value, large cap versus small cap and domestic versus international exposures. We embark upon these tactical decisions in an effort to add marginal value to your expected return not to time the markets. We never lose sight of the longer-term view that markets typically rise over time but also mean revert. These tactical positions will always be made within the context of your chosen long-term asset allocation. In the book The Behavioral Investor by Daniel Crosby finds that investors are often prone to be over confident when they should be cautious and vice versa. These investors, including many professional ones, can be their own worst enemy when they engage in the hubris of assuming, they know better, or having the notion of this time it s different. Asset allocation accounts for over 90% of the variability of a portfolio s returns and associated volatility over time. Finding and adhering to a desired allocation discipline is one of the major tenants to successful investing. Basing investment decisions on short-term market movements can be counterproductive. Our positioning: We remain somewhat cautious as the late stage economic expansion chugs on. As mentioned, equities are much more fairly valued than the beginning of last year and offer better absolute return potential than bonds. International investments, especially emerging markets, look to be cheap but continue to suffer from the effects of a strong dollar and bouts of investor risk off behavior driven to a great degree by events in and around China. We have no tactical overweights in our stock portfolios, preferring to match our long-term allocations to growth, value, small cap and international investments. Bonds should continue to be advantageous in providing portfolio stability and an income stream for investors but could be impacted by the occasional spikes in interest rates and widening of spreads relative to treasuries. Alternative assets may play a larger role in portfolio construction if we make an unanticipated move to reduce equity exposure below targets in portfolios. We do always advise our clients to review their portfolio allocation to ensure comfort in the risk level represented. Please feel free to reach out and contact us with any questions that you may have. A note on John Bogle, former Chairman of the Vanguard group who recently passed away. John was a proponent of making the investing world fairer and more accessible for the average investor. His firm s development of passive indexing strategies brought pressure on all types of asset managers in the industry to bring down expenses and improve performance. In addition, Vanguard is owned by its investors and the company plows back profits to lower internal costs he was always on his client s side. He was truly a constructive disrupter in our industry. As always, we remain vigilant in the pursuit of your financial success. Richard J. Diem, CFA

3 EHD Advisory Services Allocation Q Asset Class Allocation Stocks Cash Bonds Alternatives Stock Allocation Large Growth Emerging Markets Small Cap International Developed Mid Cap Large Value Sector Allocation Energy Real Estate Consumer Staples Utilities Financials Industrials Communication Services Consumer Discretionary Technology Health Care Materials Major Changes in Q4 Reduced equity to market weight with a negative watch Raised cash, alternatives & bonds to market weight with a positive watch Growth vs Value neutralized Bond Allocation Alternative Allocation Investment Grade Corporate Investment Grade Municipal Floating Rate Emerging Market Debt High Yield Treasuries Agencies Managed Future Global Macro Interest Rate Hedge MLP s Commodities Overweight Marketweight Underweight EHD Advisory Services, Inc William Penn Way Lancaster, PA Joyce A. Libby, CFP Principal, President Richard J. Diem, CFA Principal, Chief Investment Officer Phone: Fax: Rjdiem@ehdavisory.com Kennth L. Eshleman. CFP Principal Steven P. Maher Principal, Investment Analyst

4 DISCLOSURE FOR MARKET COMMENTARY THIS COMMENTARY INCLUDES REFERENCES TO CERTAIN INVESTMENT RECOMMENDATIONS BY EHD ADVISORY SERVICES, INC. OUR INVESTMENT ADVICE IS GIVEN IN THE CONTEXT OF EACH CLIENT S PARTICULAR INVESTMENT CIRCUMSTANCES AND OTHER PARTICULAR CONSIDERATIONS, AND IT SHOULD NOT BE ASSUMED THAT EHD ADVISORY SERVICES, INC. WILL MAKE THE SAME OR SIMILAR RECOMMENDATIONS FOR YOUR ACCOUNT. IT ALSO SHOULD NOT BE ASSUMED THAT IN- VESTMENT RECOMMENDATIONS MADE IN THE FUTURE WILL BE PROFITABLE OR WILL EQUAL THE PERFORMANCE OF ANY SECURITIES MENTIONED IN THIS MARKET COMMENTARY. THIS MARKET COMMENTARY INCLUDES STATEMENTS THAT DESCRIBE OUR EXPECTATIONS AS TO THE PERFORMANCE OF CERTAIN SECURITIES AND INDUSTRY SECTORS IN THE FUTURE. ALTHOUGH SUCH STATEMENTS ARE BELIEVED BY US TO BE REASONABLE WHEN MADE, CAUTION SHOULD BE EXCERCISED NOT TO PLACE UNDUE RELIANCE ON THESE STATE- MENTS, WHICH ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. IF THE RISKS OR UNCERTAINTIES EVER MATERIALIZE OR THE ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THOSE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. PORTFOLIOS ARE SUBJECT TO THE GENERAL RISKS ASSOCIATED WITH PORTFOLIOS IN- VESTED IN EQUITIES AND BONDS. EXAMPLES OF RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: THERE IS A RISK OF LOSS OF PRINCIPAL. THERE IS A RISK THAT COMPANIES PURCHASED WILL NOT PERFORM AS EXPECTED. THERE IS A RISK THAT ISSUERS WILL DEFAULT ON DEBT OBLIGATIONS. EHD ADVISORY SERVICES, INC. CANNOT PROVIDE ANY GUARANTY THAT THE EXPECTATIONS DESCRIBED IN THIS MARKET COMMENTARY WILL BE REALIZED. THIS MARKET COMMENTARY IS ORIGINAL, WRITTEN BY EHD ADVISORY SERVICES, INC. AND ALL DATA, FACTS AND FIG- URES ARE FROM WHAT WE BELIEVE ARE RELIABLE SOURCES. HOWEVER, WE CANNOT GUARANTEE THE ACCURACY OF ANY DATA, FACTS AND FIGURES. PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS. THEREFORE, NO CURRENT OR PROSPECTIVE CLIENT SHOULD ASSUME THAT THE FUTURE PERFORMANCE OF ANY SPECIFIC INVESTMENT OR STRATEGY WILL BE PROFITABLE OR EQUAL TO PAST PERFORMANCE LEVELS. ALL INVESTMENT STRATEGIES HAVE THE POTENTIAL FOR PROFIT OR LOSS. CHANGES IN INVESTMENT STRATEGIES, CON- TRIBUTIONS OR WITHDRAWALS, AND ECONOMIC CONDITIONS, MAY MATERIALLY ALTER THE PERFORMANCE OF YOUR PORTFOLIO. DIFFERENT TYPES OF INVESTMENTS INVOLVE VARYING DEGREES OF RISK, AND THERE CAN BE NO ASSURANCE THAT ANY SPECIFIC INVESTMENT OR STRATEGY WILL BE SUITABLE OR PROFITABLE FOR A CLIENT'S PORTFOLIO. HISTORICAL PERFORMANCE RESULTS FOR INVESTMENT INDEXES AND/OR CATEGORIES, GENERALLY DO NOT REFLECT THE DEDUCTION OF TRANSACTION AND/OR CUSTODIAL CHARGES OR THE DEDUCTION OF AN INVESTMENT-MANAGEMENT FEE, THE INCURRENCE OF WHICH WOULD HAVE THE EFFECT OF DECREASING HISTORICAL PERFORMANCE RESULTS. THERE ARE NO ASSURANCES THAT A PORTFOLIO WILL MATCH OR OUTPERFORM ANY PARTICULAR BENCHMARK. ASSET ALLOCATION AND DIVERSIFICATION DO NOT ASSURE OR GUARANTEE BETTER PERFORMANCE AND CANNOT ELIMI- NATE THE RISK OF INVESTMENT LOSSES. ALL INDICES ARE UNMANAGED AND MAY NOT BE INVESTED INTO DIRECTLY. S&P 500 INDEX IS A CAPITALIZATION WEIGHTED INDEX OF 500 STOCKS DESIGNED TO MEASURE PERFORMANCE OF THE BROAD DOMESTIC ECONOMY THROUGH CHANGES IN THE AGGREGATE MARKET VALUE OF 500 STOCKS REPRESENTING ALL MAJOR INDUSTRIES. THE ECONOMIC FORECASTS SET FORTH IN THE PRESENTATION MAY NOT DEVELOP AS PREDICTED AND THERE CAN BE NO GUARANTEE THAT STRATEGIES PROMOTED WILL BE SUCCESSFUL. INVESTING IN STOCK INCLUDES NUMEROUS SPECIFIC RISKS INCLUDING: THE FLUCTUATION OF DIVIDEND, LOSS OF PRINCI- PAL AND POTENTIAL ILLIQUIDITY OF THE INVESTMENT IN A FALLING MARKET. THE PRICES OF SMALL AND MID-CAP STOCKS ARE GENERALLY MORE VOLATILE THAN LARGE CAP STOCKS. BONDS ARE SUBJECT TO MARKET AND INTEREST RATE RISK IF SOLD PRIOR TO MATURITY. BOND VALUES WILL DECLINE AS INTEREST RATES RISE AND BONDS ARE SUBJECT TO AVAILABILITY AND CHANGE IN PRICE

5 BOND VALUES WILL DECLINE AS INTEREST RATES RISE AND BONDS ARE SUBJECT TO AVAILABILITY AND CHANGE IN PRICE. CORPORATE BONDS YIELD MAY DIFFER FROM THE ADVERTISED YIELD. MUNICIPAL BONDS ARE SUBJECT TO AVAILABILITY AND CHANGE IN PRICE. THEY ARE SUBJECT TO MARKET AND INTEREST RATE RISK IF SOLD PRIOR TO MATURITY. BOND VALUES WILL DECLINE AS INTEREST RATES RISE. INTEREST INCOME MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX. MUNICIPAL BONDS ARE FEDERALLY TAX-FREE BUT OTHER STATE AND LOCAL TAXES MAY APPLY. IF SOLD PRIOR TO MATURITY, CAPI- TAL GAINS TAX COULD APPLY. HIGH YIELD/JUNK BONDS (GRADE BB OR BELOW) ARE NOT INVESTMENT GRADE SECURITIES, AND ARE SUBJECT TO HIGHER INTEREST RATE, CREDIT, AND LIQUIDITY RISKS THAN THOSE GRADED BBB AND ABOVE. THEY GENERALLY SHOULD BE PART OF A DIVERSIFIED PORTFOLIO FOR SOPHISTICATED INVESTORS. GOVERNMENT BONDS AND TREASURY BILLS ARE GUARANTEED BY THE US GOVERNMENT AS TO THE TIMELY PAYMENT OF PRINCIPAL AND INTEREST AND, IF HELD TO MATURITY, OFFER A FIXED RATE OF RETURN AND FIXED PRINCIPAL VALUE. ALTERNATIVE INVESTMENTS MAY NOT BE SUITABLE FOR ALL INVESTORS AND INVOLVE SPECIAL RISKS SUCH AS LEVERAGING THE INVESTMENT, POTENTIAL ADVERSE MARKET FORCES, REGULATORY CHANGES AND POTENTIALLY ILLIQUIDITY. THE STRATEGIES EMPLOYED IN THE MANAGEMENT OF ALTERNATIVE INVESTMENTS MAY ACCELERATE THE VELOCITY OF POTENTIAL LOSSES. THE FAST PRICE SWINGS IN COMMODITIES WILL RESULT IN SIGNIFICANT VOLATILITY IN AN INVESTOR S HOLDINGS. INTERNATIONAL INVESTING INVOLVES SPECIAL RISKS SUCH AS CURRENCY FLUCTUATION AND POLITICAL INSTABILITY AND MAY NOT BE SUITABLE FOR ALL INVESTORS. THESE RISKS ARE OFTEN HEIGHTENED FOR INVESTMENTS IN EMERGING MARKETS. VALUE INVESTMENTS CAN PERFORM DIFFERENTLY FROM THE MARKET AS A WHOLE. THEY CAN REMAIN UNDERVALUED BY THE MAR- KET FOR LONG PERIODS OF TIME. BECAUSE OF ITS NARROW FOCUS, SECTOR INVESTING WILL BE SUBJECT TO GREATER VOLATILITY THAN INVESTING MORE BROADLY ACROSS MANY SECTORS AND COMPANIES. INVESTING IN MUTUAL FUNDS INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL. AN INVESTMENT IN ETFS INVOLVES RISKS SUCH AS NOT DIVERSIFIED, PRICE VOLATILITY, COMPETITIVE INDUSTRY PRESSURE, INTERNATIONAL POLITICAL AND ECONOMIC DE- VELOPMENTS, POSSIBLE TRADING HALTS, AN DINDEX TRACKING ERRORS. YIELD TO MATURITY (YTM) IS THE TOTAL RETURN ANTICIPATED ON A BOND IF THE BOND IS HELD UNTIL IT MATURES. THE RUSSELL 2000 INDEX MEASURES THE PERFORMANCE OF THE 2,000 SMALLEST COMPANIES IN THE RUSSELL 3000 INDEX. THE S&P 500 INDEX IS A MARKET-CAPITALIZATION WEIGHTED INDEX OF THE 500 LARGEST U.S. PUBLICLY TRADED COMPANIES BY MARKET VALUE. LPL FINANCIAL AND EHD ADVISORY SERVICES ARE NOT AFFILIATED WITH VANGUARD.

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