Happy New Year and thank you for your continued support.
2018 ended as one of the most volatile times in history. Starting in the third quarter, the markets floated with a 20% decline. Throughout that quarter, 2% daily swings were common, and volatility spiked to historic levels.
Over the next couple of years, success in investing will rely on our ability to lift our gaze from the daily news and focus on future opportunities. Recent pullbacks in the market have created a better investment landscape; investors who maintain a longer term perspective should be successful in 2019.
There are three major reasons for the onset of concern last quarter: a global slowdown; a possibly hawkish Federal Reserve; and domestic and global political turmoil.
China’s economy is maturing and is trying to keep its place as the premier low-cost manufacturer for the world. That will be difficult, as wage inflation and a growing middle class in China are preventing low cost production. However, this is a positive global development and an opportunity as the growing middle class in China will start becoming more active consumers. Historically, China has been reluctant to open its markets to foreign suppliers and that is why our current government is trying to negotiate a better trade platform.
In addition, the European economy is slowing due to ongoing budget issues with Italy, France’s destructive and disruptive yellow jacket protests, and Britain’s undefined exit commonly known as Brexit. This year, the European Union has an opportunity to construct a better definition of an active member of the EU and to define its trading partnerships. In 2019, I believe that the EU will make progress as a unified region with enhanced trading capabilities better suited to its different nations.
Market weakness in December was focused on the Federal Reserve’s raising interest rates and shrinking balance sheet. Even though the Fed oversees a growing US economy, some experts were looking for more accommodating language in response to deteriorating foreign economic numbers. The Fed’s commentary, coupled with tax loss selling at the end of the year caused the markets to test levels not seen since 2017.
Lastly, continued trade disputes, turnover in the President’s cabinet and a change in leadership in the House of Representatives are cause for additional concern for the markets.
On the other hand, I believe that the markets are oversold and that there are opportunities in 2019. The Fed has stated that it is evaluating global conditions and will consider amending current policies in response to a changing global economic environment. On a positive note, the Fed believes unemployment numbers will continue to decline, which will aid US consumers. Corporate earnings and expectations were reduced last quarter, but US sales remain strong due to declining unemployment and evidenced by record-setting holiday sales. Healthcare, Technology and Retail/Household sectors will be areas of opportunity this year.
Lastly, any improvement in the trade disputes, an end to the US government shutdown or the Fed communicating a clear dovish policy will cause the markets to trend higher.
Even though the markets will be defined by volatility in 2019, I believe the risk in the markets remains to the upside.
Again, Happy New Year and please do not hesitate to call with any questions.