As the market crashed in 2018 we looked at the economy, stock markets, and sentiment to put together a game plan to head into 2019.

2. AGENDA
- Discuss The Economy
- Discuss The Corporate Environment
- Discuss Sentiment
- Discuss Market Positioning
- Putting It All Together And What To Do Next

3. Why Focus on The Economy
• Economic Recessions Lead to Longer/Deeper Bear Markets
• Only 1 of 11 pullbacks greater than 10% since 1976 have turned into
Bear Markets with 1998 coming close.

4. 1987 Bear Market
• Lasted 4 months Peak to Trough
• Majority of Losses in one day -22.61% for the DJIA

5. 1998 Near Bear Market
• Lasted 3 months Peak to Trough
• Recovered Losses in 3 Months

6. Current Economic Backdrop
• Leading Economic Indicators Still Strong
• Other than 1987 big corrections came after LEI turned lower

7. Current Economic Backdrop
• Unemployment Usually Troughs Before Recession

8. Current Economic Backdrop
• Jobless Claims Are Not Spiking Either

9. Current Economic Backdrop
• Manufacturing slows well before a recession
• It also slowed much earlier than the 2011 and 2016 corrections

10. Current Economic Backdrop
• Service Sector Gauge near record highs

11. Current Economic Backdrop
• New home sales have peaked and will be a drag
• However, new home sales did not contribute as much as the past

12. Current Economic Backdrop
• Auto sales have peaked as well
• Have not been a great predictor of previous recessions

13. Current Economic Backdrop
• Freight Shipments have peaked and come down
• Need to watch but still above most of the level from 2013-2016

14. Current Interest Rates
• Yield Curve has predicted the last 3 recessions
• Yield Curve is flattening but not inverted yet

15. Current Interest Rates
• High Yield spreads usually move higher before recessions
• Spreads were higher in both 2011 and 2016
• Currently widening but did not move until oil collapsed

16. International Economic Backdrop
• European economy peaked early this year
• Europe also had a recession in 2011 and 2012

17. International Economic Backdrop
• China Industrial Production appears to be weakening again
• As the economy matures this level is more normal

18. International Economic Backdrop
• China retail sales continue to weaken
• It is no wonder even with tariffs the trade gap with US continues to
widen

19. The Federal Reserve
• Stuck in a difficult position with strong data in the US
• Weakening data in Europe and China
• Political Pressure
• Market Pressure
• Potential for Asset Bubbles (1998 near bear market rebounded with a
fed interest rate cut and eventually made the dot com bubble worse)
• Unprecedented zero interest rate policy following the great recession
• Flattening yield curve
• Widening credit spreads

20. Why Focus on Corporate Earnings
• Corporations are what make up
the stock market
• Corporations tell us about the
economy
• Corporate earnings are big
proponent of stock market
returns
• While multiples fluctuate,
earnings are easier to predict

21. Corporate Valuations
• Multiples are no longer expensive
• Earnings estimates for the most part should not fall dramatically

22. Corporate Earnings
• Since stocks are forward looking forward estimates are important
• Estimates for next year are higher and haven’t seen major revisions

23. Recent Corporate Announcements
• Nike surprised by 13% on earnings and 2% on sales and raised
guidance going forward
• Fedex had a strong quarter but guided numbers down 19% from
current estimates on “weak international markets”
• Boeing initiates new $20 billion stock buyback and increases dividend
by 20%
• Salesforce.com beat earnings by 21% and stated “I see still several
years of good solid growth for the economy.”
• Micron gave weak guidance related to mobile phones

24. Why Focus on Sentiment and
Positioning• Sentiment and positioning are important because they tell how
investors are currently viewing the market
• These indicators help to tell where surprises may come from
• When positioning gets too far in one direction it can cause big
reactions when there is a surprise
• Example
• Sentiment is negative causing investors to position short the
market. There is a positive news surprise and many people
need to buy into the market causing it to move higher

25. Current Sentiment
• While it is easy to say sentiment is negative, the fear/greed is
extreme
• You can not get much lower than 4 so it would take a lot to make
people more fearful

26. Current Sentiment
• The number of bulls is dwindling although not yet extreme

27. Current Sentiment
• The number of bears is rising although not yet extreme

28. Positioning
• Big traders were record short expecting 10 yr yields to rise.
• As yields fell the short position dropped which led to next market
drop

29. Positioning
• Big traders were record long crude oil in early 2018
• While the positioning came down over the course of the year it
accelerated after the initial market downturn in October

30. Positioning
• For 2 years traders made huge bets against volatility
• The unwind of these trades in February caused a big correction
• Traders quickly went back to the short position through September

31. Putting Together The Puzzle
• In 1987 the crash was caused by new program trading and the false
security of portfolio insurance
• In 1998 we had the Asian Financial Crisis which led to the blow up of
hedge fund LTCM (Long Term Capital Management)
• Currently we have Algo traders which uses signals across different
markets to trade faster than any human
• Over the course of this correction downward moves in one asset have
caused selling in others. It started in stocks and then moved to oil
which effected yields, which effected credit spreads, which effected
volatility

32. Putting Together The Puzzle
• It is difficult to say what triggered the initial sell off because there has
been a lot of negative press especially politically
• However because of the extreme positioning in asset classes a mild
pullback turned into a large correction very quickly
• History will be the only way to know for sure what actually happened
this year and it may be that a few big funds blew up

33. Looking Forward
• The economy probably peaked this year but is strong enough to not
have a recession in the near term
• Corporations fundamentals are mixed and valuations are cheap
enough that stocks have become attractive
• Sentiment is so negative that it can lead to upside surprises
• Positioning has become negative enough that an upside surprise can
lead to a fast recovery in prices
• Bottoms can come at any time and may still be lower from here, but
without a recession the downside should be limited
• Following these indicators closely will be important to know when to
change allocations and reduce risk

34. Thank You
For any follow up questions or if you would like more information or
support of these views please contact
email:markpainter@everguidefinancial.com
Disclaimer: This presentation was constructed by EverGuide Financial Group.
This presentation is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors
should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.
The Company has prepared this presentation based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express
or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein.