The financial markets in 2018 were clouded by reports of a slowing global economy and concerns the long expansion was winding to a close. Many stock markets experienced their worst year since 2008. Equities around the world have been revaluing themselves to this slower pace of growth. Uncertainty around trade policies, together with higher interest rates, have dragged most stock values into correction territory, while many technology stocks have experienced declines over 20% from their late summer levels.
Investors are being confronted with many contradictions. American unemployment is at nearly a 50-year low with wages and income rising, as January's robust job report just reaffirmed. This fundamental strength is very important for our American "consumer spending" driven economy. Most corporate earnings reports from 2018 were stellar, but accompanied with a forecast for slower rates of growth in the year ahead. Better or worse has been more impactful on stock values than good or bad over the last quarter. We were not shocked to see the long-over-due selloff. However, the magnitude of the decline over the last 3 months has been surprising to many investors who grew complacent after such a long period of low volatility.
Geopolitics in 2019
Geopolitics mattered in 2018 and will continue to influence markets in 2019. We expect our trade negotiations with China and future interest rate increases by our central bank to remain at the forefront for investors in the new year. If our economy is growing in late 2019, our expansion will become the longest in history.Despite many ongoing concerns, we do not see a recession looming on the near horizon. Although we expect a slower 2.0% rate of economic growth this year, that growth should remain above the trend we have experienced throughout most of the last decade.
2019 a Difficult Environment for Investors
As volatility remains elevated, we think 2019 will be a difficult environment for investors. Our divided government in Washington will remain grid-locked, the on-going trade dispute will continue to grab headlines and our central bank's monetary policy will likely stay the "normalization course" of interest rate increases. Despite China's longer term world-view, we see the U.S. as holding the higher ground in this contest of wills. Their export driven economy is feeling the impact of the tariff war to a greater degree than the United States, as the 34% decline in the Shanghai stock index for 2018 suggested. We anticipate President Trump and China's President Xi Jinping will resolve their trade dispute this year, perhaps out of political necessity. With the global economy continuing to grow in 2019, stock markets do not appear over-valued.
Reducing Equity Through Raising Cash Levels
We have learned over the years that smart investors step away from the noise of the day. Noise levels have certainly been high in recent months. Our portfolio's disciplined diversification has effectively cushioned our client's financial security during the recent market downturn. Underweight stock allocations entering 2018, we reduced overall equity percentages further by raising cash levels as the year progressed. Cash was the only major asset class with positive returns last year. U. S. Government bonds and Gold positions moved upward, helping buffer the correction in equity prices. Jerome Powell's comments last week assuaged "auto-pilot fears" and reaffirmed a prompt change of course if a slow-down looks imminent. We expect the $U.S. will level and then weaken relative to the €uro, ¥en and British £.That should reflate the international stock markets, which were pummeled last year with the $U.S. currency strength.
Our Compass Center portal continues to get "rave reviews" from clients as an efficient time saving tool that is simplifying their lives and providing more control over their financial world. Our Pacific Wealth Management team is enjoying the Financial Planning sophistication, and the clarity of the interface, when we present our retirement planning analysis.
Best wishes for a New Year that brings joy, peace, and happiness to you and your entire family.
James C. Kuntz, CIMA®
Mark C. Hill, CFP®, CDFA™
Co-founder, Wealth Advisor
Justin C. Kuntz, CFP®, CDFA™
Director of Financial Planning