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Weekly eNews: January 7, 2019

Financial Market Update

Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.

Last Week

Stocks posted solid gains by the close of the first week of the new year. A favorable jobs report helped push the benchmark indexes listed here higher last Friday, as stocks recovered from an ominous start at the beginning of the week. Helping ease investors’ fears of a slowing economy, Fed Chair Jerome Powell indicated economic data is pointing to a good start to the economy in 2019, but, more importantly, the Federal Reserve is amenable to making adjustments if necessary. The small caps of the Russell 2000 led the way last week, followed by the Nasdaq and the Global Dow. The large caps of the S&P 500 and the Dow also advanced by more than 1.50%.

Oil prices advanced slightly last week, closing at $48.26 per barrel by late Friday, up from the prior week’s closing price of $45.07 per barrel. The price of gold (COMEX) increased last week, closing at $1,286.70 by last Friday evening, up from the prior week’s price of $1,283.10. The national average retail regular gasoline price was $2.266 per gallon on December 31, 2018, $0.055 lower than the prior week’s price and $0.254 less than a year ago.

S&P 500: 2531 (up 1.86% for the week and up 1% for the year)
NASDAQ: 6738 (up 2.34% for the week and up 1.56% for the year)
Dow: 23433 (up 1.61% for the week and up 0.45% for the year)
US Treasury 10yr: 2.66% (from 2.71% last week)
Crude Oil (February): $47.96 (from $45.33 last week)
Gold (February): $1,285.80 (from $1,283.00 last week)
USD/Euro: $1.1397 (from $1.1442 last week)

StrategicPoint of View®: 2019 The New Year
The New Year is supposed to be a fresh start. We get to begin all over again with energetic resolutions and stalwart promises, putting last year’s disappointments behind us. Investors are all for leaving behind 2018, which was a particularly rough year. Most asset classes turned in negative performance while volatility punctuated the year at dizzying levels. Will markets turn over a new leaf in 2019? Or will we see more market angst?

Markets aren’t predictable – at best they hint at trends or tendencies with varying probabilities unfolding. Investment management is the art of protecting against the worst of these tendencies while seeking opportunities in the best. At StrategicPoint we study the economic fundamentals, technical analysis, valuations, sentiment and other factors to help formulate our strategy.  Above all else, we look to where we are in the business cycle, as that can help determine whether volatility signals a longer term bear market or a shorter term correction in the midst of a continuing bull market.

Sometimes it pays to become more defensive early. At other times riding out volatility with a more aggressive portfolio will be the better choice. A third choice, and the one we are following this year, is to tweak around the edges of our portfolios until we have a better sense of where the markets and economy are headed in the coming year.

The Fundamentals
2018 was an exceptionally strong year for the economy (blockbuster earnings – thanks in part due to the tax cuts, low unemployment, continuing accommodative monetary policy, modest inflation, strong spending patterns and positive sentiment on the part of consumers and businesses alike.) It wasn’t a typical year for a major sell off. That may bode well for a more permanent rally if the next recession can be held off.

That said, there are concerns that could bring forward a downturn in the economy. Chief among them are: an ongoing and escalating trade war with China; US monetary policy that raises interest rates and tightens too fast; and continuation of the global slowdown, potentially magnified by Brexit in Europe and China’s internal fiscal policies. It is unlikely that we will develop firm convictions (positive or negative) of any of these potential pitfalls until after the first quarter.

Company earnings, too, may be a huge factor in 2019. As the immediate effects of the Tax Cuts and Jobs Act fade, year over year earnings comparisons could fall. The issue is how far they will retreat.  Traditionally the most pessimistic earnings outlook comes right before the next quarter earnings report (end of March for Q1 earnings). When actual earnings come in, they traditionally surprise to the upside. If this pattern continues this quarter, then markets, which appear oversold even if still overvalued, could rally. Unfortunately, we won’t know if 2019 earnings will have rolled over or stayed buoyant on an after-tax-cuts basis until April of next year.


Technical Analysis
With the rise of computerized, algorithmic trading and passive investing, there are fewer active investors to step in when the markets tank or rally (JP Morgan Asset Management).  With computerized trading, momentum often replaces analysis. Momentum strategies can cause markets to overshoot to both the downside and the upside when the remaining active investors step aside to let the bear run or ride a raging bull. Most recently, active investors appear to be on the sidelines watching the markets rather than leading them.

Those who follow technical analysis also look for tipping points to signal a bottom of any market collapse. Capitulation is one of those tipping points. Capitulation translates as “panic”.  Analysts look for a sign that investors have exhausted their selling capacity. At that point those who are likely to be spooked into dumping their holdings are already out of the markets. What is left are buyers who can scoop up positions at relatively inexpensive prices. Currently, according to Ned Davis Research (NDR), market sentiment is falling, but it hasn’t turned pessimistic yet. NDR believes that we have not seen capitulation and volatility will likely remain until the bottom is technically reached.

Valuations also play a role in determining when a market is oversold and when an attractive entry point has been reached. Despite the dramatic increase in company earnings this year, valuations are still relatively high from historical standards, although not excessively, according to Ned Davis Research and BCA Research. Stocks might have fallen more this past year if it weren’t for companies spending their tax cut revenue to buy back their shares. And interest rate increases are still working their way through the system. Rising interest rates can take away from the attractiveness of stocks as returns from bonds increase. On the other hand, some of the best returns are made in the late stages of the business cycle (see below), valuations aside. Investors need to be in the market to benefit from a late stage rally. Which brings us to the overriding question of where we are in the business cycle.

Business cycles
Business cycles are reoccurring fluctuations that bring the economy from being above trend growth to below trend growth and back again. Recessions occur when low trend growth turns negative – unsettling employment, income, spending, investment and the like. The fluctuations themselves can be caused by internal factors (primarily consumer and business decisions) and external factors (government involvement and natural forces) and follow patterns that broadly tend to repeat themselves over time.

Arguably, the Federal Reserve has the greatest influence on business cycles. Its mandates are to control/tamp down inflation especially at a peak in the business cycle, and to stimulate employment during business cycle troughs. Currently analysts disagree over whether the Federal Reserve is moving too fast in raising rates, which could tilt the US into an early recession, or too slowly, which could prevent us from being able to effectively manage the next downturn.

At the same time, Congress and the President have stimulated growth through tax cuts and increased spending. These actions were designed to propel growth forward and keep the economy out of a recession as long as possible, and especially until after the next election. However, there is debate as to whether the stimulus will fade and require more actions by Congress and the President in 2020 to try to keep a recession at bay. If new stimulus gets bogged down in Washington, postponing a recession could become less likely.

So where does that leave us for 2019? For at least another quarter, we believe the equity markets – both in the US and overseas – could remain quite volatile as traders struggle with the uncertainties outlined above.

Beyond that point, there could be greater clarity on several of the outstanding issues and concerns. If it is deemed that a recession is not an immediate threat, the markets could experience a significant rally, characteristic of the late business cycle. If substantial uncertainty remains on a number of fronts, and there are increasing calls for an imminent recession, the outlook for the markets could be much less sanguine.

Our current belief is that a recession will be postponed until sometime in 2020 and that we are experiencing a bear market within a longer term bull market. That means we do expect the markets to rebound later this year and are holding adequate equities to benefit from this bounce. At the same time, we are making a few, select changes in certain portfolio models to hedge against the case that we are wrong.

So enjoy 2019. But we can’t wish the markets a Happy New Year just yet.

Betsey A. Purinton, CFP®
Chief Investment Officer


This Week
Can the market sustain its push upward, or was last week merely the result of investors taking advantage of lower stock prices? If the government shutdown ends, we should see many economic reports come out this week, including the latest releases on international trade, the federal budget deficit, and the Consumer Price Index.

Visit the StrategicPoint Blog

Blog & Whitepaper offer: Organizing Your Finances for the New Year: Your Complete Financial Checklist
One of the most appealing aspects of the new year is that it presents the opportunity to do things right. Our comprehensive financial checklist will help set the foundation for a successful year.


Market Commentary: 2019 The New Year
Markets do not appear to be turning over a new leaf – quite yet — in 2019. Read our New Year Outlook from Chief Investment Officer Betsey A. Purinton, CFP®.



StrategicPoint in the Media

Miss our most recent TV appearance?  Watch the latest video!  To catch our advisors on WJAR/NBC 10 with Frank Coletta, visit our blog.


*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Part of this content contributed by Forefield, Inc.