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Capital Markets Review & Commentary: December 2018

The Stock Market

Global stocks resumed a downward slide in December, led by US equities. International stocks held up better for the month and the full fourth quarter, but were the worst performing asset class for the year. Investors sought safety in gold and bonds, with domestic and international fixed income up approximately 2% in December.

While declines are almost always unpleasant, the fourth quarter helped validate the benefits of remaining disciplined and taking a longer-term view.

Trade War Impact, Interest Rate Environment, and the State of the Economy

Equity losses in October were attributed to increased rhetoric on trade with China and messaging from the Fed that short term interest rates would continue to rise. By December, however, there were signs of progress on trade and Fed Chairman Powell suggested rate hikes may slow in 2019. Stocks continued to fall anyway. This tells us the market is no longer reacting solely to daily headlines, but is instead attempting to weigh the odds of a meaningful slowdown in global economic growth.

Timing recessions is extremely difficult, and generally futile. Most economic data points remain solid, though there are some red flags. In the US, unemployment hovers around all-time lows, profits are at all-time highs and growing, and inflation remains in check. The housing market remains soft in terms of volume, but prices continue to advance in most regions. The story abroad is even more mysterious, with sluggish growth in Europe and weakening conditions in China.

Our Take

In the short-term, the sell-off feels overdone. For 2019 in general, our outlook is balanced. As usual, it isn’t a good time for letting fear or greed dictate approach. If anything, declines make stocks attractive than they were a few months ago. Valuations are now mixed. The forward PE of the S&P 500 is at 15, which is compelling relative to still low interest rates. Other metrics such as price to sales or the value of the US market compared to GDP show stocks remaining expensive. International stocks are trading at lower valuations and are compelling on this basis. After years of US dominance, we believe a global approach is highly likely to be rewarded over the coming years.

Both market volatility and the New Year are great reasons to review your financial plan.

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