Market & Economic Outlook | December 2018

by | Dec 18, 2018 | Newsletters


We separate the relevant from the noise, to bring you market updates that helps you on the path to and through retirement! 


S&P 500: 2,599.95 (-2.8% YTD) as of 12/16/2018

STATE OF THE MARKETS                                                             

Stocks have been on a wild ride since early October when Fed Chairman Powell said The Fed was “a long way” from neutral. That led to a quick 9.7% decline. After that, stocks rallied 6.5%, only to drop another 6.4% (in November), and recover 6% (in early December) followed by another drop of 6.8% in mid-December. These wild swings caused the Fed to backtrack a bit in that they now think their benchmark interest rate is “just below” neutral.

Further exacerbating the situation, was a record $46.2 billion that investors pulled out of mutual funds and exchanged-traded funds in just one week (December 5 -12) (1). This shows the high level of investor fear. Short-term indicators are now flashing an extremely oversold condition and historically when record amounts are pulled from the market, “stocks start turning significantly higher after three months” (1).

2018 is turning out to be a year when, essentially, the only asset class that is performing well is cash. Virtually, every other asset class has been negatively affected – large cap technology stocks are down sharply from their recent highs, international stocks have been down double-digits, and bonds have lost value with rising interest rates. It seems like only the most defensive areas like healthcare, utilities, and consumer discretionary have held their ground this year.

We do not believe that this is the end of the bull market. FactSet still expects 2019 earnings to grow 8.6% and sales to grow 5.6% (2). Earnings growth has been higher in 2018 but given the market’s drop, valuations are much more reasonable heading in to next year. In addition, there are now signs that the Fed will raise rates one more time in December (.25%) and maybe just one more time later in 2019 – previously they were expected to raise rates at least three times next year. A more accommodating Fed, along with better trade arrangements with China (we expect some sort of trade deal early next year), would go a long way towards stabilizing our markets and allow the economic cycle to be extended. For these reasons, we remain cautiously optimistic and are a buyer at these levels.



Since December 2015, the Fed has been gradually raising short term rates to provide a cushion should another financial crisis develop and to prevent bubbles from forming. This has gradually increased the amount income savers are receiving from virtually nothing over the last decade, to now over 2.1% in some money market instruments. In addition, 2-year bank instruments are paying over 3% and investment grade corporate bonds are paying, in some cases, in excess of 4%. These are the highest rates we’ve seen in 10 years.


Since October 3, crude oil futures have dropped 26% in addition to closing lower for 12 consecutive sessions – a record (3).

But why is oil dropping? Booming U.S. output, more Iranian oil supply, and increased production from Russia & Saudi Arabia. The oil rig count in the U.S. now stands at 888 – its highest level since March 2015 (4). U.S. oil production is at a record 11.7 million barrels a day. U.S drilling and production is likely to keep growing robustly according to the Energy Information Administration.

Also helping to keep prices down are the wavers the Trump Administration gave to eight countries who continue importing some volumes of Iranian oil. The precipitous drop in gasoline prices – 21 cents just in the last month equates to a $21 billion tax cut for consumers.



Value investing has a long history of outperforming growth. According to a study by Eugene Fama and Kenneth French (seminal 1992 paper), academic research demonstrated value outperforms growth over the long run. From June 30, 1927 through December 31, 2016, value stocks’ annualized return was 13.5% outpacing growth stocks’ 9.2% return by a wide margin, according to AFAM Capital. Value investing can be described as buying stocks that trade below their intrinsic value while growth stocks reflect companies whose profits grow consistently and at a faster clip than the overall market.

In recent years growth has outperformed value. However in July, the divergence between Value & Growth was 4.3 standard deviations (relative to the returns of the past 10 years according to Charlie McElligott Nomura) – meaning value stocks appear to be vastly undervalued. Consequently, this may be the time to consider value over growth.

If you are looking for opportunities in value stocks we recommend Confluence Equity/Income strategy. Their returns have exceeded the S&P 500 Index by almost 5% annually since 2000 (10.6% vs. 5.7%). Plus, they have had only one down year since inception (2008). They seek companies which possess substantial competitive advantages and are trading at discounts to their intrinsic value.


After the drubbing the market took the last quarter, it’s only nature to wonder if your exposure to stocks is too high. Particularly since we are in the midst of the longest bull market since World War II. Some market experts think we are in a secular bull market that has 6-7 more years to go. Others think we are in the 7th inning of a 9 inning game. Obviously, no one can predict the future with any certainty, but in our conservative approach to investing, its seems prudent to gradually throttle back your allocation.

We recommend you make adjustments to your asset allocation during periods of market strength or when the market is approaching new highs not during periods of sell-offs like we’ve seen in recent weeks. So if we start to see strength in the stock market in the first quarter, we highly recommend that you re-examine your asset allocation to make sure it’s appropriate given your age, risk tolerance, and income needs.

Bottom Line

The combination of Fed rate hikes and ugly trading relations with China caused investors to panic (by pulling a record $46.2 billion out of mutual funds and exchange-traded funds in just one week). Lower prices along with earnings rising 22% in 2018, has made valuations much more reasonable. Thus, we remain cautiously optimistic and are a buyer at these levels.


Last week, our True North Team along with spouses, were treated to a holiday dining experience at the Melting Pot –  a fondue restaurant with a variety of different cooking styles. We also participated in a highly competitive White Elephant gift exchange where coveted items, such as the Golden Girls “Rose” Chia Pet and the – As Seen On TV, “Huggle” were highly sought after. A great time to connect outside of the office and enjoy the company of our coworkers!


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David specializes in working with families and business owners as their personal “CFO” by creating and implementing a financial roadmap designed to help them pursue their goals. He is proud that he still works with clients from the very start of his career (in 1982!).

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