2018 Fourth Quarter Newsletter
Let me see if I can offer some guidance and cut through the fog. Corporate earnings (S&P 500) are still very strong, up over 25% for 2018 and expected to be up another 8 to 9% in 2019. The PE ratio is now under 14 and normal is 15 to 16, so there is potential. Foreign countries are doing well and there is potential there also. The 10 year Treasury has sold off and that is a problem (dollars coming out of the marketplace and into Treasuries).
There is no one cause for this melt down; there are many. The Fed rate increase; possible inflation; trade war; Brexit; mid-term election; low productivity; liquidity, computer trading; future corporate earnings; Donald Trump; Congress and politics in general are most of the reasons I can find. Sentiment is negative so anything that is good is considered bad and anything that is bad is considered really bad. Markets in general do not like uncertainty and we seem to have lots of that.
Many of these are smoke, so I will not go through them all, just the reasons I think are more important than the others.
Fed Rate Increase – The US economy is strong enough to handle a .25 rate increase. Most went crazy with the increase and the stock market sold off. Think what would have happened if the Fed said no increase….. the discussion would be how weak is the US economy that it can’t withstand a meager .25% increase. I think the selloff would have been greater.
Low Productivity – This comes from Alan Greenspan. His thoughts are that without a 3% or so increase in productivity, our economy cannot grow as needed. He thinks the mandatory $15 per hour is the wrong way to improve the economy.
Liquidity – The Fed is continuing to draw down its inventory of Treasuries by about $50 billion per month, drawing more dollars out of our economy and creating a liquidity problem. After the recession, the Fed started this with buying the bonds and putting massive amounts of dollars into our economy to promote growth. Now the Fed is selling bonds and does not think this is having an impact on economic growth. If buying bonds promotes growth, then selling bonds should do the opposite. You can’t have it both ways. The result is uncertainty.
Computer Trading – Once a stock or a market has many trades, computer programs for some investors take over (algorithms). What you get is the herd mentality with many programs doing the same thing at the same time; in this case selling.
Donald Trump – Uncertainty is the best description I can come up with. His style lately is unsettling for the marketplace.
Politics – I have never seen adults continuously behave this way and I think it may get worse. Both sides of the aisle are acting like spoiled children. This creates uncertainty.
I am not sure what 2019 will bring, no one does. The economy looks strong, the stock market’s measurements look strong and consumers seem to be spending. Unemployment is about as low as it can get, oil prices are low and interest rates may plateau. Foreign companies have been beaten down and may become 2019’s leader. Uncertainty and negative sentiment may override the market positives. My thoughts are the stock markets will be positive for 2019 and I expect a lot of volatility early in the year and trending positive.
If the 2018 volatility carries over into early 2019, please let me know if these gyrations are causing you problems. I can offer some alternatives.
An investment in stocks is an investment that says you believe the US economy and the world’s economy will improve in the future. Your specific time horizon should help dictate how your investments are allocated.
If you have a variable loan rate, you may want to think about paying down the principle faster to avoid possible future market rate increases.
Regarding the Required Minimum Distributions (RMD) for 2018, I would prefer that everyone start their 2019 RMD prior to December 15th so you are sure to stay within the IRS guidelines. That would make it easier for us to track.
Fixed annuity rates for a five year contract are 3.65% as of now. If you want more information, please let me know.
Please note that Emily and I will be away most of February and half of March. Please let me know if you anticipate a need for cash during this time. Our office will be available to help you and I will be in touch daily to solve any and all needs. Do not hesitate to call us.
Thank you for your trust and your business. I will continue to do my best for you. No one controls the economy. All we can do is try to foresee what is going to happen and invest early enough to reap the rewards.
Thank you for your business and referrals.
James F. Mangam, Jr., CFP, CLU