Fourth Quarter 2018 Executive Summary

If the fourth quarter could be summed up in one word, it would probably be uncertainty – not a word that the markets tolerate well.  U.S. equity markets posted their worst annual performances since the Financial Crisis, due in large part to an excruciating December.All major indexes declined at least 8.7% for the month, and the DOW and S&P 500 recorded their worst December performance since 1931. 

In spite of evident hurdles, the general consensus regarding the economic outlook was bright going into Q4. As we begin 2019, the US economy remains strong, with solid economic growth and strong corporate profits.  Recession risks remain low, with U.S. consumers continuing to benefit from an improved job market and wage growth. 

• Earnings Growth.  Analysts estimate Q4 2018 earnings by companies in the S&P 500 will increase by 20.3% from last year.  That would be the highest annual earnings growth for the S&P 500 since 2010. All eleven sectors are projected to report year-over-year growth in earnings.
• Gross Domestic Product.  Real GDP grew at an annual rate of 3.4% for Q3 2018 (down from 4.2% in Q2), and Q4 estimates are indicating annual growth of 2.7%.
• Unemployment.  The latest released results (12/28/2018) show U.S. unemployment holding steady at 3.7% for the last three months, an all-time lowest level since 1969.
• Consumer Price Index (CPI).The CPI-U (CPI for All Urban Consumers) was unchanged in November after rising 0.3% in October, seasonally adjusted.For the 12-months ending November 2018, the CPI-U rose 2.2%, compared to a 2.5% increase for the same period last year.
• Consumer Confidence.The Consumer Confidence Index fell to 128 during Q4 2018, from 136 in November but up from 122 in December 2017.According to the Conference Board’s consumer confidence survey, expectations regarding job prospects and business conditions still suggest that the economy will continue expanding at a solid pace in the short-term.
• Housing. Housing starts were up 0.49% for the three months ending November 2018, (a year-over-year decrease of 0.80% over the same period last year) as higher building costs and rising mortgage rates begin to impact the new home demand.

So, what’s all the fuss about?

Several factors are weighing on market performance and increasing volatility. 

• Investor concern regarding the Fed’s tightening monetary policies and continued rate hikes are causing economic headwinds and market volatility (although the Fed recently indicated a softer approach to future rate hikes in light of low inflation, adding that policymakers will also take into account recent stock market volatility).

• Trade policy, an increasing source of uncertainty (especially in light of the highly publicized trade negotiations between the U.S. and China), is eroding U.S. business confidence and putting pressure on stocks.

• The ongoing government shutdown adds to this climate of uncertainty.  With prior shutdowns quickly resolved leaving relatively modest damage to the economy, this could simply be par for the course.  However, if it drags into late January or beyond, it could take a noticeable toll on the economy and further impact already fragile consumer confidence.

• While we expect corporate profitability and cash flow to remain strong in 2019, the pace of earnings growth will likely decelerate due to slower global growth, lower oil prices, a stronger dollar and the lessening impact of 2018 tax cuts.

• Global growth rates remain positive overall but not everywhere, and while global manufacturing activity continues to expand, it is doing so at a much slower pace.

At CORE, we continue to focus on fundamentals and adhere to a long-term investment strategy.  We don’t speculate, and we don’t derail long-term plans with short-term reactions.

Stay in your seat come times of trouble.  
It’s only people who jump off the roller coaster who get hurt. – Paul Harvey

U.S. Market Performance

Executive Summary Sources:
https://www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html (December 31, 2018)
https://www.cnn.com/2019/01/04/investing/dow-stock-market-today/index.html (January 4, 2019)
https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_122118.pdf (December 21, 2018)
https://www.bea.gov/news/2018/gross-domestic-product-3rd-quarter-2018-third-estimate-corporate-profits-3rd-quarter-2018 (December 28, 2018)
https://www.frbatlanta.org/cqer/research/gdpnow.aspx (December 21, 2018)
https://data.bls.gov/timeseries/lns14000000 (December 28, 2018)
https://www.bls.gov/news.release/cpi.nr0.htm (December 12, 2018)
https://www.conference-board.org/data/consumerconfidence.cfm (December 27, 2018)
https://www.census.gov/construction/nrc/index.html (December 28, 2018)
https://www.kiplinger.com/article/business/T019-C000-S003-housing-market-forecast-housing-starts-home-sales.html (November 30, 2018)
https://www.cnbc.com/2019/01/04/fed-chief-powell-just-walked-back-his-autopilot-remark-and-the-financial-markets-love-it.html (January 4, 2019)
https://www.reuters.com/article/us-global-economy/euro-zone-factory-growth-surges-to-record-more-uneven-in-asia-idUSKBN1ER0QL (January 2, 2019)
Morningstar.com, DOW, S&P500 and NASDAQ index charts 12/31/2017 to 12/31/2018.

The views expressed represent the opinion of Asset Management Financial Solutions, Inc. (“AMFS”) and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and AMFS’s view as of the time of these statements.  Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.