Riding Out the Storm Means Planning For It Ahead of Time

Martin Landry, CFA, CFP®, CAIA, CIMA®, CIPM, CTFA, AIF®, Manager of IMRG and Senior Portfolio Manager

All data as of Dec. 28, 2018

As severe weather across the U.S. continues to wreak havoc on Americans’ travel plans, we can’t help but think about how the markets have been stormy as well. With both travel and market movement, we know volatility can occur, but we do not know when. Planning ahead gives you an itinerary to follow to an intended destination and the ability to ride out any bumps along the way. While the hardest part of investing is sticking to your plan when volatility occurs, doing so is key to getting you where you want to go – whether that’s by plane or investment.

Here are a summary of factors contributing to recent stock market volatility, positive economic news and items to consider as we head into 2019.

Factors to Consider

• The Federal Reserve voted to raise short-term interest rates on Dec. 18 for the fourth time this year – more than market anticipated a year ago.
• The government shutdown has also created uncertainty, which in turn affects the markets.
• There are concerns that the U.S. company earnings growth will not be as strong in 2019 as they have been in 2018, as we have had five straight quarters of double-digit earnings growth for S&P 500 Index companies.
• Chinese policymakers are attempting to stimulate the economy by loosening monetary policy, which could slow the country’s economic growth. Uncertainty over trade negotiations between the U.S. and China are only exacerbating the situation.
• Issues in the U.K. related to Brexit, fiscal indiscipline in Italy and ongoing economic slowdown in Germany and France are major concerns of the eurozone countries.
• The world is currently in an oversupply of crude oil and prices have adjusted quickly. While lower gasoline prices are good for drivers, the lower oil prices are tough on the energy sector – which includes sub-sectors like energy exploration, production, transportation and refining.

Positive Indicators

• U.S. real GDP growth for the year is anticipated to be approximately 2.9 percent. The personal savings rate remains high, as does the sizable private sector financial surplus.
• Real income continues to grow due to rising wage growth and lower oil prices.
• The U.S. national unemployment rate remains at 3.7 percent for the last three months, the lowest level since 1969. We have seen 26 consecutive months of a national unemployment rate below 5 percent, and many major metropolitan areas around the country have unemployment rates below 3 percent: San Francisco (2.6), Boston (2.6) and Minneapolis/St. Paul (2.1).
• Preliminary data from MasterCard SpendingPulse suggests U.S. consumers spent more than $850 billion in-store and online between Nov. 1 and Dec. 21, up 5.10 percent from last year. This includes a 19.10percent increase in online sales over last year.

Areas to Watch

• Some recent regional manufacturing surveys conducted by the regional Federal Reserve Banks showed a decline in December. However, most components remained in positive territory, though expected shipments and new orders were muted.
• General Motors Company announced restructuring plans, which include laying off more than 14,000 employees in North America and shuttering plants in Ohio and Michigan. Ford Motor Company is following suit with an $11 billion restructuring plan. Ford’s plan could cut deeper than GM’s by eliminating as many as 25,000 jobs ― many in the U.S. and Canada. However, it looks like much of the cost-cutting efforts will likely be directed in Europe.
• Some non-manufacturing surveys have declined over the past three months; even those that rose indicate a slower pace of growth.
• The Conference Board’s Consumer Confidence Index declined from all-time highs in December and expectations for the future also declined off all-time highs. Consumers’ expectations for their household income fell sharply off all-time highs for those in the lowest income brackets (under $35,000). Surveys of those who think there will be more jobs in 6 months fell sharply despite historically low unemployment rates.

Sources:

Fed up, US Economic Watch, Bank of America Merrill Lynch, Economics, Dec. 19, 2018

Fed gives market a lump of coal, Global Research Highlights, Bank of America Merrill Lynch, Investment Strategy, Dec. 21, 2018

Short-Term Energy Outlook, U.S. Energy Information Administration, December 2018

Global Views: A Glass Half Full, Author: Jan Hatzius and Sven Jari Stehn, Goldman Sachs Economics Research, Dec. 21, 2018

Global Markets Daily: Not Dovish Enough for Markets, Authors: Zach Pandl and Kamakshya Trivedi, Goldman Sachs Economics Research, Dec. 20, 2018

About Martin Landry

Martin Landry, CFA, CFP®, CAIA, CIMA®, CIPM, CTFA, AIF® is the manager of the Investment Management Research Group (IMRG) and a senior portfolio manager at 1st Global, where he oversees the planning, execution and success of the IMRG, a role that includes implementing the IMS Select and RMS Select discretionary model portfolios. He began his career at 1st Global in 2010 and previously served as an investment due diligence analyst and a portfolio manager prior to stepping into his current position in 2016.

About the Investment Management Research Group

The Investment Management Research Group (IMRG) of 1st Global is a team of tenured investment professionals that operates under the oversight of the 1st Global Investment Committee and is tasked with finding “best-in-class” investment managers and products for use across the IMS Select Portfolios strategies as well as other IMS programs. The team’s primary responsibilities include portfolio construction and investment manager due diligence, monitoring and selection. The team brings years of experience and investment knowledge to help guide clients with asset class allocation and individual fund selection, which are aimed at providing optimal risk-adjusted returns within each risk category.

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1st Global is headquartered at 12750 Merit Drive, Suite 1200 in Dallas, Texas 75251; (214) 294-5000. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. This commentary should not be considered a solicitation or offering of any investment product. Neither asset allocation nor diversification assures a profit or protects against a loss in declining markets.

Past performance is no guarantee of future results. Index performance does not reflect the deduction of any investment-related fees and expenses. It is not possible to invest directly in an index.

The S&P 500 Index is a free-float market capitalization index of 500 large publicly held U.S.-based companies, capturing 80 percent coverage of U.S. equities. It is often used as a proxy for the American stock market.