The Big Picture:

• The diversified approach will ward off the effects of the current volatility
• Late year sell-off has created attractively priced US Equities
• This is the longest expansion in history – 113 months from June 2009

There were three .25-point Federal Reserve (FED) rate hikes in 2018 – heated trade squabbles between the US and China which commanded investor attention. The emerging markets slow-down in China, which influenced and spread to other emerging market economies. This volatility expanded from the emerging markets to the developed markets affecting equity and bond markets. Rising interest rates and fears of slowing earnings growth fueled a sharp decline in US equities, that began in early October.

Will the FED continue to raise rates?

This week all eyes are on the FED, waiting to see if the FED will announce their last rate hike for 2018. We think the FED will not raise rates in 2018, due to the recent market volatility. We do believe that the FED will tamp on the breaks in 2019 and be slow to raise rates. Although we do believe that the market and the economy will be able to withstand 2-3 rate hikes in 2019. The hard-economic data signals continued strength in the US labor market and industrial production are “reasonably” strong. Inflation is moderate and there seems to be no further changes on the horizon. The FED is still on the path of “normalizing” rates as they have been very open to announce and communicate their intension to raise rates, although there might be a pause in this strategy.

Are we in Mid-Cycle or Late -Cycle rally?

This argument has been going on for the last several years; we may be in the 7th or 8th inning or more mid-market cycle. In the wake of the 2008 crisis leverage was decreased, corporate cash was at very low levels, and corporate debt was very high, hence there was no strength or cushion in the corporate balance sheets. Currently, companies are stronger, have higher amounts of cash not so much corporate debt and banks have higher reserves. Fiscally the economy is doing very well, economic fundamentals remain strong and solid.
For 21 months the growth stocks lead the market. In the past five years the S & P Index returned 11%! After such an up-turn the market usually goes into a corrective phase, which we have experienced in October and November; this type of market decline is not unusual. The leadership of the equity markets has been narrow, as a few stocks lead the market, there has been a change from the big-cap Tech stocks – the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks in favor of more defensive type of stocks, such as the utility or consumer staples, such as Home Depot or Pepsi. Although, today the market has rebounded and is up +239 points.

Looking ahead….to 2019

Economic fundamentals in the United States remain solid. US Stocks are still relatively cheap on a long-term basis – corporate earnings grew at 25% with the help of the 2017 US tax reform package along with the Trump administration’s push for deregulation. Those factors were positive for economic Growth and corporate profits.
We remain positive for the market to return mid-single digit earnings growth in 2019. It is the precise reason why our portfolios remain fully diversified in the equity sectors and the fixed income sectors to protect our client’s assets. Our bond portfolios are very short term to ensure our portfolios keep up with rising rates. After two years of virtually no volatility, we believe that the current market volatility will continue in 2019. We have introduced several investments to dampen the effects of volatility.

In the 2nd half of December we encourage:

• Gifting for tuition and to family members – Each individual can give $15,000 to each family member
• Contributing to your IRA’s and 529
• Using your Required Minimum Distribution from your IRA – to gift to charity rather than paying income tax on the amount
• Perhaps initiating a Donor Advised Fund at The Pittsburgh Foundation

We would be happy to discuss our market and gifting thoughts
Happy Holidays & a Prosperous New Year from our Schenley family to yours!!