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Market Perspective - December 2018


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Market Perspective - December 2018

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Market Perspective - December 2018

  1. 1. Market Perspective – December 2018 Experience Insight Impact Overview: “Uncertainty” has become a widely used word these days. In fact, between political uncertainty, Federal Reserve uncertainty, earnings uncertainty, currency uncertainty (and more), investors are awash in negativity. Markets detest uncertainty. This month, we frame the current state of the markets with a historical viewpoint. In addition, we update some of the critical market concerns such as the current interest rate environment and Federal Reserve policy. 1
  2. 2. Under The Surface… Experience Insight Impact 2 Through December 17th, the market has already been hit very hard, with 9 of 11 sectors in correction  territory and many large companies already in “bear market territory.” Source: FactSet and Marketwatch
  3. 3. Under The Surface… Experience Insight Impact 3 • 2018 has proven to be a rare year where virtually every asset class is below the flat line (as of 12/20). However, one takeaway is that more often than not, asset classes have some mean reversion over longer periods of time. • As an example, after several years of poor performance in Emerging Market equities, this asset class outperformed in 2017. • This historical perspective demonstrates the importance of a well diversified portfolio, which by definition will have various asset classes with lower correlations.
  4. 4. Prior Corrections Experience Insight Impact 4 • While declines of the current magnitude are not overly common, they do occur somewhat regularly. • This graphic from Vanguard demonstrates that we see events like this every few years. • After several years of subdued volatility, Q4 2018 saw the dramatic return of it. • Throughout history, volatility has generally been associated with opportunity for well diversified long term investors.
  5. 5. Federal Reserve Update Experience Insight Impact 5 As expected, The Federal Reserve (“the Fed”) raised interest rates by ¼ of a point at its December 19th meeting. Despite Chairman Powell commenting on the Fed being “data dependent,” his tone was perceived by market participants to be overly aggressive for future rate increases. Data dependence implies the path of increases are uncertain and will depend on what the economic data demonstrates. Global growth is perceived to be slowing, although the Fed sees a healthy U.S. economy & slightly below trend inflation. Market participants, as noted in the chart above, do not expect more than one more rate increase over the next year, although the Fed indicated we may have two increases (again stating that the path will be data dependent). Source: Bloomberg
  6. 6. Why Global Trade is a Concern  Experience Insight Impact 6 • Many of the largest U.S. companies were  built and grew within the global trade  regime, which existed over decades. • According to S&P Global, 43.6% of the S&P 500 sales are foreign sales  (i.e. products or services produced and sold outside of the U.S.). S&P  states that this is a starting point to provide a glimpse into the global  composition of U.S. companies. • While the announced tariff threats from both U.S. and China are  relatively small in relation to global GDP, companies in the U.S. and  abroad rely heavily on global operations to run their businesses,  which in the short run creates more uncertainty as policy is reshaped.
  7. 7. Market Perspective – December 2018 Experience Insight Impact Conclusion: With uncertainty prevailing, markets around the world have declined dramatically. Corrections are a normal part of market cycles, but each correction is different in nature. That being said, we are cautiously monitoring the current environment for signs of policy and economic change to put certain parts of the uncertainty to rest. 7
  8. 8. Disclaimer Experience Insight Impact Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8