Q4 2018 Economic and Market Perspective

In the fourth quarter of 2018 the major indexes suffered their worst quarterly decline in roughly a decade and December went on the books as the worst month since the Great Depression. Plunging oil prices caused the energy sector to be the worst performer in the S&P 500 index, falling by nearly 24%. Technology, industrials, and consumer discretionary shares were also exceptionally weak, while the typically defensive utility sector was the sole segment to escape with a small gain, less than 1%.

From an index total return point of view for 4Q 2018 we had the following:

Dow Jones Industrial Average -11.31%
S&P 500 -13.52%
Nasdaq Composite -17.54%
S&P MidCap 400 -17.28%
Russell 2000 -20.20%

It’s apparent that the Federal Reserve’s decision to raise interest rates was a source of contention for the equity markets. In fact, just about every rate increase last year (four total) was met with short-term volatility, a reckoning that the era of easy money was officially coming to a close. I’ve argued and written on numerous occasions that I do not believe the Fed has committed any monetary policy errors to date. I believe higher interest rates are warranted, particularly since the Fed is moving the fed funds rate from historically low levels of zero. In my opinion, the idea that moving the fed funds rate to a neutral rate of approximately 3% is somehow disruptive and dangerous, is misguided. Given that the US economy is growing at a firm pace, evidenced by the S&P 500 earnings rising near 20% and the unemployment rate currently near a 50 year low, a change in pace is completely warranted. As they always do, rising interest rates, or rather the expectation of where those rates will go, will always play an integral part in where the market moves from here.

It goes without saying that political risk is rampant in the marketplace. Ask a registered voter of any US political party what they stand for and you’ll likely get an earful. Ask those very same people to define who they are as an investor and there is a good chance you might get a pause followed by a vague or loosely worded exclamation. We believe that investors should be just as in tune and passionate about their money as they are about their brand of politics. Quite often the two converge due to the 24/7 news cycle and the broad reach of the Internet. People are being inundated with political news/agendas designed not only to inform, but to misinform as well. In many cases, it is up to the end user of this information to judge it’s authenticity, which is easier said than done nowadays given the rapid pace and how information is disseminated. If it’s possible for everyone to take a step back and relax a bit, I think the world will be a better place.

Over the past several years technology stocks have become an increasingly important part of major indexes, and as such, the valuations and price movements of these stocks attract a significant amount of attention. I believe that technology will continue to change the way businesses operate. For that reason, I feel that investing in technology and/or communication services stocks as a means to benefit from this change limits the opportunity set. Instead, we cast a wider net and focus on identifying companies in other sectors, such as financials and healthcare which are creating new ways of incorporating technology into existing processes, thus creating more sustainable competitive advantages and lowering cost. Therefore, while our explicit exposure to certain sectors may shift overtime, our view on the importance of technology as an integral part of driving businesses will continue to point us towards companies that have an eye towards innovation.

2018 was one heckuva year. For the first time ever, the S&P 500 ended the year with a loss after being ahead for the first three quarters and as predicted, came with big time volatility. We remind you that your first instinct should not be to panic, but look forward and plan comprehensively for a long-term solution as opposed to succumbing to an impulse reaction when the markets move against you in the short term. As always, feel free to reach out with any questions or concerns.

For further information please email: Info@Nashvillepwm.com