January 15, 2019 Letter to Clients
Happy New Year! Well the markets in 2018 certainly started and finished with a bang, taking investors, including myself, on quite the wild ride. The beginning of this year has been off to a refreshing start with most major indices seeing a great uptick, providing an increase to our client’s portfolio values following the year end low. In this first letter of the new year I will discuss what factors contributed to the market volatility as well as my market outlook as we begin 2019.
Market Highlights of 2018
Trade tensions, higher interest rates, slowing global growth and politics dominated the financial markets throughout 2018, marking the return of volatility. 2018 was a stark contrast to 2017, which had investors spoiled with impressive returns and extremely low volatility. 2018 was a record-setting year for stocks, some good and some not so much. A historically strong January was bookended by a historically weak December. The volatility was felt no more so than in the final quarter, December in particular, with Wall Street experiencing the worst Christmas Eve sell-off on record followed just two days later with the largest single point gain in history. This was occurring despite a strong U.S. economy and job market, record corporate earnings and relatively contained inflation, leaving financial professionals to debate the root cause of the sell-off and leaving investors to wonder what 2019 would bring.
Fourth Quarter Rollercoaster Ride
Up until October 3rd the market was on course to deliver the projected high single-digit to low double-digit returns that I had discussed in my July letter. It was on that day that a comment made by Fed Chairman Jerome Powell triggered what I believe started the market panic seen in the final quarter of the year. Powell stated in an interview that the central bank was “a long way” from neutral interest rates and that “we don’t need” the “really extremely accommodative low interest rates” the central bank put in place a decade ago. While these comments initially garnered some attention with the markets having a notable, yet not overly unsettling decline, I believe this was the catalyst to the sell-off that ensued causing the markets to lose nearly $2 trillion.
While Powell’s comment was enough to initiate a selling frenzy, it was the subsequent cascade of other concerns that now had a spotlight shed on them; concerns that were preexisting yet had mostly been ignored by investors and the markets until that point. These concerns included:
- The US-China Trade Battle
- A Continuing Messy Brexit Situation
- Global Economic Slowdown
- Inflation Fears
- Ongoing Political Drama
While not a surprise, the December announcement of the fourth interest rate hike of 2018 to 2.5 percent, a decision made because the economy was stronger and healthier than expected as noted by Powell, Powell has found this decision heavily scrutinized by investors, Wall Street and President Trump as the decision went against the popular view held that the Fed should continue to stimulate the economy, which was in part fueled by low rates. This is a view that I myself shared as well.
Politics & Markets Mix
The subject of politics is a polarizing one for many of us and is just one reason that, when it comes to investing for myself and clients, I take a neutral stance and instead focus on strong economic data and sound fundamentals in my decision making. I am a firm believer that individuals are entitled to their opinions and beliefs and respect that among our diverse clientele those opinions and beliefs vary greatly. As a financial advisor I do however think it is my responsibility to consider how politics can play a key role in impacting the overall global markets, especially in the short term. The current government shutdown, the President’s frequent use of Twitter and the turnover of key political figures within Washington all contribute to investor uncertainty and if there is one thing the stock market does not like, it is uncertainty. With the likelihood of political theatrics continuing into 2019 I consider that it will be one of the key components to how investors, and subsequently the markets, behave this year.
Looking Forward to 2019
I maintain cautious optimism for 2019 as I see it being a year of transitions. Diversification, active portfolio management, discipline and flexibility will be at the core of our investment approach as we navigate through this volatile year.
Some key factors that will help shape the markets in 2019 include:
- The U.S. economy remains healthy with a strong labor market, low unemployment and robust job growth. It is projected to continue to grow in 2019, although at a slower pace.
- Earnings growth is expected to slow due to corporate and personal tax cuts beginning to fade, interest rate hikes, wage pressure and trade/tariff issues. While consumer spending has been strong, contributing to the over 20 percent in corporate growth in 2018, the question of that growth being sustainable going forward is starting to emerge.
- Global economic growth has also slowed, though at varying degrees in different countries. Uncertainty surrounding trade, monetary policy and the potential for disruptive geopolitical events will fuel market volatility going forward.
- The forecast for real global gross domestic product (GDP) is 3.5% in 2019, down from 3.7% in 2018 while in the U.S. it slows from 3.0% in 2018 to a projected 2.0% in 2019.
- U.S. inflation has largely been contained however is expected to likely drift, not spike, higher in 2019 as a result of monetary tightening.
In Closing
To put it bluntly, 2018 was a challenging year for the markets and 2019 is likely going to be as well. I’ve said it before and I’ll say it again. I wish I had a crystal ball since forecasting the market’s next move is difficult, especially since investor psychology and geopolitical factors can move the markets more so than fundamentals. There is some uncertainty going into 2019 as factors such as political drama, international relations, trade policy and the government shutdown are ongoing, and the actual U.S. and global economic growth remain to be seen. That said, market volatility has been and always will be a given and while unsettling you can be rest assured that our portfolios are built to withstand the ups and downs by utilizing strategies to both cushion the impact and to capture the upswing when the market bounces back, which it always does. Remember that nightmare of a year 2008? Investors who didn’t attempt to time the markets or go to cash and instead stayed the course by remaining in well diversified portfolios were later rewarded.
In closing, I would like to add that through LePage Financial Group’s relationships with top rated money managers, we are able to consult daily with some of our industry’s most highly regarded economists, financial analysts and portfolio managers to seek to ensure our client’s portfolios are diversified in a way to reduce loss as much a possible while taking advantage of opportunities as they arise. You can be confident that as the year progresses and the financial markets take shape, I will continue to do extensive due diligence and actively manage our portfolios in an informed and conscientious manner. As always, our office will keep you informed regarding the markets and economy going forward throughout the year.
I wish you and your family the very best as we begin this new year and invite you to contact our office should you have questions or concerns.
Sincerely,
Steve LePage