January 2019 - Main Street Moving, Wall Street Tumbling

Celebrating 30 Years

1988-2018  

newsletter image jan 2019.jpg

 

Main Street Moving, Wall Street Stumbling

January 2019 Newsletter and Outlook

Economy & Global Markets

After ten years of relative low volatility, the market has experienced three months of headline grabbing swings, with U.S. market indexes (Dow, NASDAQ, S&P 500) ending nearly 15% below where they were at the end of September, and down more than 10% in the month of December alone, which represents the worst December percentage loss since 1931[i].  Investment returns in many equity, bond and credit markets all converged and ended 2018 in the red[ii].  The tech-heavy NASDAQ Index slipped into bear market territory in December, falling over 21% from its high in late August[iii].  There is no better example of volatility than the Dow Jones Industrial Average falling more than 650 points the day before Christmas to experience its worst point drop in Christmas Eve history, followed the day after Christmas with the largest daily point gain in history, advancing more than 1,080 points[iv].  Keep in mind that according to the Wall Street Journal, “roughly 85% of all trading is on auto-pilot—controlled by machines, models, or passive investing formulas” which can tend to move the market fast and often in the same direction as other auto-pilot traders[v].  This is in stark contrast to individual and institutional investors who may use fundamental research, instinct, and vision to invest for the long-term.   

 

In my view we are not heading into recession or a prolonged bear market, at least not anytime soon, stated with the realization that the stock market can sometimes be a telling indicator of what the future portends.  As we move into 2019 with anticipation and some anxiety after the recent market downturn, it is my view that the correction we have been experiencing since the beginning of October seems to be more emotional, than logical and it would not be a surprise to see markets move forward in the year ahead based on the fundamentals present in the economy.  However, we may continue to see volatility along the way.  Investors are concerned, despite the stable U.S. economy at present, with the negative impact of a prolonged trade war, higher short-term borrowing costs, and waning fiscal and monetary stimulus[vi].

 

  Although we began 2018 along a synchronized global growth path, the U.S. economy picked up steam this year while China and Europe slowed markedly.  Europe’s slowdown is centered around weakened exports, especially to China, while demand inside the Eurozone has remained relatively stable[vii].  Political and economic uncertainty in Italy, as well as, Great Britain’s “Brexit” from the European Union will be areas to monitor in 2019, as they will affect the growth potential in the region[viii]

 

 

Yet, as we head into 2019 the International Monetary Fund is projecting 3.7% global growth for the coming year[ix].  Some disagreement among economists exists as to where the U.S. and other international economies are in the business cycle, but the consensus agree the U.S. is in the late stage, or 7th to 8th inning, using the baseball analogy[x].  Some economists dissent from this view, arguing we are in the late mid-stage, or 5th to 6th inning, marked by strong consumer confidence, solid household balance sheets[xi] and positive purchasing manager sentiment.  Coupled with a solid labor market, hardy industrial production[xii] and moderate inflation[xiii] , it may suggest this expansion may have some time to run[xiv].  However whatever stage or inning we are in, disagreement exists as to whether this economic growth might go on for some time or could we slip into recession in the next 6-12 months.  In a recent article, economists surveyed by the Wall Street Journal put a 22% chance of recession by the end of 2019, with conversely a 78% probability that one will not occur during this time period; but the same survey revealed only a 14% chance earlier this year[xv]

 

The U.S. currently has the lowest unemployment in half a century[xvi], wage growth that is accelerating moderately, along with modest inflationary pressures and a Federal Reserve that has begun to tighten monetary policy[xvii].  Inflation does not appear to be a major risk as we look to 2019, despite lower unemployment and higher wage pressures[xviii].  Additionally, the Fed has been reducing its balance sheet from $800 billion before quantitative easing began in 2008 to a peak of $4.6 trillion, which many had contributed to the rise in equity prices during the past ten years and that now may be a headwind going forward[xix].  On the positive side, corporations have accelerated buying back their own stocks, with buy-backs in the third quarter of this year more than 50% above the same quarter in 2017[xx].  The increased rate of stock buy-backs and the increased stock dividend distributions are likely fueled in part by the tax cuts and could be expected to continue[xxi].  Although hundreds of billions of dollars have moved from offshore subsidiaries to U.S. parent companies as the new tax law intended, a substantial portion still has not repatriated back[xxii].  Additionally, although companies have on average increased the pace of stock buy-backs and have increased dividend distributions in record numbers, companies have not overwhelmingly utilized the corporate tax cuts to purchase capital assets and expand operations, at least not as much as originally touted by lawmakers[xxiii].  Much is still in flux as regulations corresponding to the new tax law are still being issued and the ultimate pace of corporate investment in new plant, equipment, innovation and personnel attributed to the corporate tax cuts may not yet be known.

 

Recession fears continue to haunt investors now that we have experienced our second correction in 2018 with solid blue-chips continuing to fall despite the positive fundamentals.  Worsening U.S.–China trade tensions and unexpected tightening by the Fed are two of the risks faced by investors as we look to 2019[xxiv].  Investors have in the past tended to buy stocks after weekly declines, known as “buying-the-dip”, but the past few months that trend has diminished as investors ponder recession and bear market possibilities[xxv].  After being leaders in the market the last few years, technology stocks have been especially volatile during the recent market correction, possibly due in part to potential government regulation and slower earnings growth in the future[xxvi].  Despite this recent volatility, many of the big technology companies have solid fundamentals, are market leaders and continue to find new areas of innovation and growth potential[xxvii].  Yale economist, Robert Schiller, who correctly called the internet bubble in the late 1990s, as well as the housing bubble in 2007, now believes we are once again in a housing bubble based on the Case-Shiller home price index, which has advanced 53% since home prices bottomed in February 2012[xxviii].  However, others argue that we are not in a housing bubble for two reasons: First, the price to rent ratio (price of homes/what they would rent for) is in line with historical averages and not elevated as it was in the last housing boom.  Second, the pace of homebuilding is slower now and in line with the population demand, than the pace in the last housing boom, where more homes became available than the population required, sending prices downward[xxix].

 

A slowing economy and earnings growth are not the equivalent of negative growth, especially after such a robust 2018 where growth in the second quarter came in at 4.2%, the third quarter 3.4%, and total year average expected to better than 3.1%, which is the strongest in 13 years[xxx].  Some economists refer to a transition in the economy where growth slows but without triggering a recession as a “soft landing”[xxxi].  The U.S. is open for business with lower tax rates on corporations and reduced regulation, which may take years to fully realize the potential of these policies[xxxii].  Consensus analysts’ earnings growth projections for U.S. companies in 2019 continue to be solid, albeit lower than in 2018[xxxiii].  The one cautionary sign in the solid fundamentals otherwise in the U.S. economy at present, is the fall-off in business capital investment in the third quarter[xxxiv]; this as compared to continued consumer discretionary spending that remains robust[xxxv].  The Trump tax cuts and regulatory reductions were supposed to boost corporate spending and investment here in the United States.  Initially, there was an impressive 11.5% increase in the first quarter, but by the third quarter that had slowed to 2.5%, so results are mixed thus far[i]

 

Since World War II, we have experienced 56 pull-backs of 5%-9.9%.  Since 1965, we have had 18 corrections of 10%-19.9%, or one every 2.9 years, that did not ultimately become a bear market, with the average decline 12.3%[ii].  During these corrections, we experienced an average of three months to hit bottom, and on average, another four months to hit all-time highs again[iii].  However, in the past when we went into a correction followed by recession, the stock market decline was longer in length and more severe in decline on average than when we ultimately did not go into recession[iv].  There is no guarantee that future market movements will look anything like past market performance but is put forth as a historical perspective on market volatility.

 

The 30-year Treasury Bond, a widely accepted measure of the strength of the economy and inflationary fears, fell below 3% after the Federal Reserve moved rates up by 0.25% on December 19th.  The 10-year Treasury Note also moved lower in yield, while short-term treasury rates increased[v].  We have heard much lately about the “inverted yield curve” which occurs when the yield on the 2-year treasury note becomes higher than the yield on the 10-year treasury note.  This is considered a predictor of recession because while the Fed is moving up short-term rates to slow the economy, the long-term yield comes down as a result of the lower credit demand of a slow economy.  We are not in an inverted yield curve as the 2-year and 10-year Treasury rates did not cross, or invert, as feared.  Interest rates on the 30 and 10-year U.S. Treasuries a few days later pushed higher; however, even if we were in an inverted yield curve, history reveals this indicator predicts recession on average 17 months out from the inversion, not immediately pending[vi].  Now, there is never any guarantee that history will repeat itself, especially when compared to an average, but I mention these items to keep things in perspective.  Brian Wesbury, Chief Economist at First Trust, believes the yield on the 10-year U.S. Treasury is too low and priced for a major recession within the next ten years, similar to 2008-2009, that he doesn’t see any time soon.  Mr. Wesbury believes the yield should be higher based on solid current U.S. economic fundamentals such as GDP growth and moderate inflation.  Furthermore, Mr. Wesbury believes the next recession, when it occurs, may not be as severe as the last, since now the U.S. has less stringent bank regulations with mark-to-market accounting rule changes, plus now banks are better capitalized[vii].      

 

The technology revolution in the U.S. could be a powerful and lasting force within the U.S. equity markets for some time to come[viii], especially in the consumer, technology and health care sectors[ix] where information sharing, artificial intelligence and automations are keys to profits[x].  The Eurozone, Japan, China, the United Kingdom, and Canada also appear to be in the mid-to-late economic cycle, albeit with less fundamental strength than is seen in the U.S. right now[xi].  Causation of recent market volatility in the U.S. and around the world may be attributed to three main factors, trade disputes, credit tightening, and excessive debt[xii].  The Federal Reserve has increased interest rates throughout 2018 in response to a tight labor market, moderate inflation and a strong economy with the objective to maintain full employment and keep inflation near their target of 2%.  The fear is higher interest rates, compared to the historically low interest rates we had been experiencing, when corporate, consumer, and government debt loads are on the rise result in higher interest costs and potentially less consumption and investment in the economy.  However, some economists argue that since Dodd-Frank and the increase of regulation that followed the Financial Crisis of 2008-2009, underwriting of debt has gotten much better and the ability of the consumer and of companies to repay their obligations is relatively solid[xiii].  Although corporate debt is at a record high, so are corporate assets, cash holdings and profits; furthermore, interest payments as a percentage of corporate profits are at or below long-term averages with corporate delinquency rates for commercial and industrial loans at record lows[xiv].

 

Global trade agreements are being rewritten as the U.S., China, Europe, Canada, Mexico and the countries of the Pacific Basin all negotiate for favorable commerce terms for their respective countries.  Currently only 12% of U.S. imports are covered by the tariffs but that number could go higher to as much as 20% if negotiations do not materialize into agreements[xv].  Tariffs of this magnitude are not unprecedented, as President Reagan had imposed tariffs on 20% of U.S. imports in 1984[xvi].  The Trump Administration states that it's trade policies are aimed at helping employees in the U.S. manufacturing sector which it highlights as part of the new U.S.-Canada-Mexico Trade Agreement[xvii].  However, President Trump will need a newly elected Congress to approve this deal and any new trade deals negotiated.  In the meantime, some countries and companies are adversely affected, thus disrupting global commerce[xviii].

 

 

Despite the recent equity market correction, U.S. stocks are still slightly elevated by historical price-to-earnings (P/E) standards but certainly less expensive than in September and are now close to the 20-year P/E average[xix].  Conversely, foreign equity valuations may be a better value based on the same historical price-to-earnings standards[xx].  Vanguard’s Economic and Market Outlook for 2019 puts forward the probability of lower U.S. equity returns verses non-U.S. developed foreign equity returns possible based on the outperformance of U.S. equities during the prior decade[xxi].  However, some economists argue that the U.S. market with large technology and health care components tends to sell at higher price to earnings multiples than most European markets[xxii] .  U.S. equities have outperformed their international peers for more than 10 years with relative outperformance of U.S. stocks the highest in 14 years which may have been accelerated by a strong U.S. dollar and recent trade disputes[xxiii].  Justin Thomson, Chief Investment Officer-Equity at T. Rowe Price, believes that emerging market currencies are undervalued at present, and consequently, that history favors considering emerging market equities and debt when this occurs[xxiv].  These are important to mention because at some point this relative outperformance of U.S. verses international equites could reverse and opportunities may unfold nicely for patient diversified investors.

 

Fundamentals by the Numbers

Retail sales were up in November and up 4.2% from a year ago[xxv].  Personal income and consumption were both up in November and up 4.2% and 4.7% respectively from a year ago[xxvi].  The Consumer Price Index was flat in November, but up 2.2% from a year prior[xxvii].  Nonfarm Payrolls increased by 155,000 in November, below the prior 12-month average of 204,000 jobs per month[xxviii].  Existing home sales were up in November, the second consecutive month, but down 7% from a year ago which is the largest year-over-year drop since 2011[xxix].  The yearly decline may be attributed to this year’s hurricane season, especially slow home sales on the west coast[xxx] and lack of supply of available homes for sale earlier in the year[xxxi].  Housing Starts increased 3.2% in November but have declined 3.6% during the prior 12-months[xxxii].  Stocks associated with homebuilders have fallen despite the current housing shortage in the U.S. and the strong job market due to a number of headwinds including the capping of mortgage interest and local real estate tax deductibility, elevated home prices, rising mortgage rates, a shortage of construction workers and the increase in the price of materials[xxxiii]

 

The ISM Manufacturing Index, measuring growth in the manufacturing sector, rose to 59.3 in November (a reading of 50 or higher signals expansion) with a 12-month average reading not seen since 1983[xxxiv].  Likewise, the ISM Non-Manufacturing Index, signaling growth in the service sector rose to 60.7 in November (a reading of 50 or higher signals expansion); this reading is the second highest in 10 years[xxxv].  New Orders for Durable Goods rose 0.8% in November and are up 5.3% in the last 12 months[xxxvi].  Industrial Production advanced 0.6% in November and 3.9% in the prior 12-months[xxxvii].  Falling for the first time in 18 months, the Producer Price Index declined 0.1% in November but is up 2.8% over the prior 12 months[xxxviii].

 

U.S. consumers appear to be in pretty good shape entering 2019.  U.S. household net worth has increased 8% year-over-year aided by equity markets and home price appreciation coupled with an increased savings rate of 6% during the prior 12 months and a reduction in mortgage debt[xxxix].  The price of oil has fallen 35-40% from its high in October 2018, despite the U.S. ban on Iranian oil and the Saudi declaration to cut oil production by a million barrels per day to reduce worldwide supply.  Some economists put forth the notion that this move downward in oil prices may signal a global slowdown in growth, while others argue this a supply issue now that U.S. production has changed the dynamics of world supply[xl].

 

The Fed, Interest Rates & Inflation

The Federal Open Market Committee, the policy-making arm of the U.S. Federal Reserve (Fed) increased interest rates on December 19th by 25 basis points for the fourth time this year and the ninth time since December 2015 and was widely expected[xli].  The Fed also revised their growth projections and inflation estimates down somewhat in their forecast for 2019, indicating two more rate hikes are expected in the coming year dependent on real-time data, down from three projected for 2019 earlier in September.  Fed Chairman Jerome Powell acknowledged as a “welcome development” that wage gains are accelerating gradually and that he did not necessarily believe that to be inflationary[xlii].  However, the market reacted negatively to the Fed’s post-meeting press conference by Chairman Powell that appeared to be relatively positive for the economy in the coming year [xliii].  The market reaction seems to indicate that investors appear skeptical about prospects for future growth, while the Fed does not see weakness other than the modest slow-down from 2018 highs that it expects in its forecast.  Some economists believe the Fed will keep raising interest rates despite inflation remaining within their target of 2% so they have room to lower rates and stimulate the economy should the economy go into recession in the future[xliv].  However, the idea the Fed would overdue this, potentially sparking a recession, to then be able to get us out by lowering rates seems preposterous.  More likely, Chairman Powell will do what is necessary to keep inflation around their target and keep the economy with near full employment, as this is their mandate and objective.  In fact, other economists believe the Fed will raise rates three to four times in 2019, despite a recent slightly more dovish stance, based on what positive economic activity might warrant[xlv].  Chairman Powell made it clear that political rhetoric does not play a role in the Fed’s decisions, apparently referring to President Trump’s recent criticism of the Fed Chairman’s pace of rate hikes[xlvi].

 

The narrative we see on television is that Fed Chief Jerome Powell is the villain behind the volatility in stocks, but I do not buy into that theory wholeheartedly.  The story began in 2008-2009 when many believed the Fed solely responsible for saving the markets with their quantitative easing and near zero interest rates during the Great Recession[xlvii].  The Fed certainly plays a role, but don’t forget about entrepreneurship, profits, tax rates and regulation.  Corrections historically occur in the market on average regularly, but economic expansions last longer on average than contractions, and it is the fundamentals underlying in the economy that drive those expansions.  If the low interest rates and quantitative easing by a central bank were the sole reason, European markets would not have underperformed our markets during the last decade[xlviii].   

 

Late in 2017, the yield on the 2-year U.S. Treasury reached that of the S&P 500 dividend yield for the first time in 10 years; fast forward to the end of 2018, and the two-year rate is now 1% higher than that of the S&P 500 dividend yield[xlix].  This may have two implications for investors looking for income; first, rates have increased on higher quality short-term bonds so those looking for income can get increased yield in an underlying investment asset class that may be less volatile than equities, albeit with less growth prospects.  Second, bond investors who had taken on more credit risk to boost yield within their bond portfolios while high-quality short-term rates were at historical lows can now diversify from credit risk bonds back to shorter-term high-quality bonds since the credit spread between the two have narrowed[l].  U.S. government short-to-medium term-bonds, tend to mitigate risk of other more volatile assets such as equities in a portfolio, and they now may be more attractive with their higher rates, coupled with the expectation that the Fed may pause its rate hikes sometime in 2019 creating a benign environment for U.S. Treasuries[li].  Increasingly, the large group of baby boomers in the aging U.S. population has increased demand for bonds in their portfolios as they near and enter retirement[lii].

 

Politics & the Mid-Term Elections

Historically, American investors do not go to sleep after a mid-term election, they move forward.  Since 1950, the U.S. stock market has posted a positive return the year after a mid-term election, even when the leadership in either House of Congress changes hands[liii].  History may not repeat itself in 2019, but my point is to highlight the importance of focusing on corporate fundamentals, such as profit growth, debt and cash flow or economic fundamentals, such as unemployment, tax policy, interest rates and regulation, more so than on political theatre[liv].  However, with a divided Congress the President’s current business friendly deregulation may likely continue, although further tax cuts are unlikely to pass through the split Congress[lv].  Additionally, trade deals negotiated with U.S. trading partners will also need Congressional approval which may or may not prove to be tough sledding for the Trump Administration[lvi].  The Democratically controlled House of Representatives will likely ensure the Republicans cannot attack the Affordable Care Act on any front[lvii].  Congress and the Trump Administration may agree on a few items that may move forward in 2019, namely infrastructure spending[lviii] and pharmaceutical drug price reforms[lix].  On the other hand, gridlock may be the name of the game with nothing of substance accomplished until the 2020 election as the Democrats and Republicans seem to have little common ground with which to reach compromise[lx].

   China and Trade

 Three years ago, China initiated a plan to transform its economy from one based on exports and infrastructure to one of consumption.  Much like the U.S., China faced the global financial crisis of 2008-2009 by implementing stimulus that resulted in an amassing of an unprecedented amount of debt[lxi].  In 2016, the plan was implemented to begin deleveraging debt which may be expected to slow future growth prospects for the world’s second largest economy[lxii].  Enter the Trump Administration to complicate China’s situation by raising trade tariffs on Chinese imports.  This is an effort to address trade imbalances and intellectual property rights between the two countries which may also affect China’s rate of growth further[lxiii].  Additionally, housing, consumer spending, credit growth and manufacturing in China are all slowing down going into 2019[lxiv]

 

China’s slowing economy may also have a ripple effect on other global economies, particularly on emerging countries that supply raw material to China[lxv].  The U.S. and China recently announced a 90-day cease fire on U.S. tariffs that involve buying soybeans and reducing tariffs on U.S. cars entering China; additionally, the Chinese government would begin to work on intellectual property theft enforcement[lxvi].  However, even after the 90-day cease fire on tariffs between the U.S. and China on December 1st was issued, it did little to quell investor fears that prolonged trade disputes could cause a global growth slowdown if left unresolved by the March 1st deadline, or if trade conditions worsen between the two countries[lxvii].  Keep in mind, free trade between countries is generally good for both countries.  Trade tariffs are generally bad for both countries as they essentially are an added cost passed on to a company or ultimately on to the consumer.  However, we do not live in a perfect free trade world, and the objective is for more favorable trade agreements with all trading partners.  Tariffs as a short term tactic to arrive at more favorable trade agreements could prove beneficial to U.S. consumers and manufacturers, but a long term trade war is probably not in any country’s interest[lxviii].

 

                                                               Timeless Investment Principles

Market declines are inevitable and do not last forever.  We expect higher long term returns on stocks than we do from cash and bonds, and for that, we also expect greater volatility based on historical data.  Over the past 116 years, market declines of 10% occur about once every 115 days[lxix].  The average length of a 10% correction is about four months[lxx] before prices begin to return to previous levels.  Market declines of 15-20% had occurred on average every 2-4 years[lxxi] during the prior 116 years.  Declines can sometimes cause imprudent behavior by filling and consuming investors with dread and panic.  History has shown that stock market declines are a normal part of the investment cycle.  Market declines have varied in intensity and frequency, but the market has always recovered from declines.  Although past results don’t guarantee future results, remembering that downturns have been temporary in the past may help quell fears[lxxii].  Since 1950, the U.S. has been in recession during only 13.5% of all months. Many of those months included positive equity returns and some of the strongest rallies occurred as stocks bounced back from those recessionary periods[lxxiii].

Short term market timing does not work.  Short term market timing is the elusive “holy grail” of investing—something you want very much, but that is very hard or impossible to achieve.  If anyone could do it consistently, sell right before something goes down and buy right back before it goes up, the rewards would be great, but typically investors end up with subpar performance due to the extreme difficulty with getting the short term timing wrong[lxxiv].  Dr. Horstmeyer, an assistant professor of finance at George Mason University, believes investors on average lose between one and two percentage points annually from market timing verses the average stated return of the investment on an annual basis[lxxv].  Although the Holy Grail most likely does not exist, the benefits of a long term disciplined investment plan are compelling, but the generally higher returns associated with investing in stocks over the long term is dependent on sticking with your investment plan through both good and bad times in the markets.  As a hypothetical example, if you stayed invested in the S&P500 index during the 20-year period 1/1/1997 to 12/31/2016, you earned 7.68% annually assuming reinvestment of dividends; however, if you missed just the 10 best days in the market during that 20-year period hoping to ride out some of the volatility, your annual return would have been reduced almost in half to 4.01%.  If you missed just the 30 best days over that 20-year period, your return was negative[lxxvi].  Obviously, past performance is not a guarantee of future results but numerous similar examples over different long term periods (20 years of more) reveal the same lesson that market timing could adversely affect your long term goals[lxxvii].  

 

Diversification is important. After studying the most brilliant and successful minds in the investment field over the past 30 years—both past and present—the one vital and common lesson learned is that diversification through asset allocation works to mitigate volatility over the long term by diversifying into separate asset classes with varying correlation to one another.  We were taught as youngsters by our parents and grandparents “don’t put all your eggs in one basket” which is a straight forward translation to allocate your investment capital into different asset classes within your portfolio.  The idea is that they all don’t go up or down at the same time—and this could not ring louder at this time.  While this may not be the case on a day-to-day basis, a mix of different types of assets provides a smoother and more stable ride for your portfolio over the long-term[lxxviii].  However, investment disciplines do not work all the time in every economic environment.  In fact, in a recent Bloomberg News article, it was argued that asset allocation in 2015 had one of the worst results in nearly 80 years with most major asset classes finishing the year with tepid results, with no asset class offering superior relative returns to lift the overall diversified asset allocation portfolio return[lxxix] so patience is essential with any investment discipline.

Our Gameplan

Our Leshnak Wealth Portfolio Models are not immune to declines in global markets as we experienced here twice in 2018, on “Brexit Friday” in June 2016, or in the 2008 financial crisis.  We do not have a crystal ball nor do any of the market analysts and forecasters.  Our belief is that our LW Portfolio Model construction has positioned us for potential resilience in this environment and has also positioned us to possibly take advantage of market mispricing.  We see no need to change course, as the ancient buddish proverb states “If we are facing in the right direction, all we have to do is keep on walking”.  We do not modify overall asset class allocation due to market corrections unless a fundamental change in the underlying outlook for the domestic or global economy has diminished or brightened verses our expectations.  Stocks had increased since the election in 2016 with little volatility except a brief correction in February of this year, so the correction we have experienced since early October may prove to be healthy and necessary for markets to advance.  Pullbacks can be expected to last relatively shorter periods on average compared to the bull markets they take reprieve from, as the greed present turns to fear and shakes out those investors who are not fundamentally based in their convictions. 

 

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component and a bias for value which prescribes a requirement for dividend yield from our investment positions.  In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, and real estate.  How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible.  This allows the manager to move assets into the sector(s) that best fit current market conditions based on their investment methodology.  Our portfolio construction has two other vital components—we want dividends from each position so no matter what markets are doing day to day, we still have dividends coming into the portfolio.  Lastly, we add value positions in our allocation by coupling a value position to each core position which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.

As your financial fiduciary, the Leshnak Wealth team cares deeply about your financial well-being and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  We know that as your advisor, the trust you bestow upon us is built and maintained on three pillars; doing what we say we will do, assisting with planning for and achieving your financial independence, and providing unbiased advice with your best interest at the forefront.  As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, December 31, 2018

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 12/31/2018 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

[I] Minton, Jessica “Dow Logs Biggest Daily Point Gain: Blue chips surge more than 1,000 as indexes rebound from severe four-session selloff”; The Wall Street Journal, December 27, 2018.

[II] Turnill, Richard “Three investing lessons from 2018”; Blackrock Global Weekly Commentary, December 17, 2018.

[III] Wursthorn, Michael “Tech-heavy NASDAQ and Dow Jones Industrials suffer biggest weekly declines since financial crisis”; The Wall Street Journal Weekend, December 22, 2018.

[IV] Menton, Jessica “Dow Logs Biggest Daily Point Gain: Blue chips surge more than 1,000 as indexes rebound from severe four-session selloff”; The Wall Street Journal, December 27, 2018.

[V] Zuckerman, Gregory and Levy, Rachael and Timiraos, Nick and Banerjt, Gunjan “Stock Rout Fueled by Market on Auto”; The Wall Street Journal, 12/26/2018.

[VI] Goldfarb, Sam “Growth Worries Fuel Volatility”; The Wall Street Journal, December 6, 2018.

[VII] “Prepare for (Soft) Landing”; Neuberger Berman Fixed Income Investment Outlook 1st Qrt 2019, December 2018.

[IX] “Prepare for (Soft) Landing”; Neuberger Berman Fixed Income Investment Outlook 1st Qrt 2019, December 2018.

[X] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XI] ‘Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XII] “Vanguard economic and market outlook for 2019: Down but not out”; Vanguard Research, December 2018.

[XIII] Goldfarb, Sam “Growth Worries Fuel Volatility”; The Wall Street Journal, December 6, 2018.

[XIV] “2019 Investment Outlook: Focus on the Fed”; Lord Abbett Market View, December 10, 2018.

[XV] “Vanguard economic and market outlook for 2019: Down but not out”; Vanguard Research, December 2018.

[XVI] Lahart, Justin “How to Spot a Recession”; The Wall Street Journal, December 27, 2018.

[XVII] Hilsenrath, Jon “The Economic Forecast for 2019: Less Growth, More Uncertainty”; The Wall Street Journal, December 4, 2018.

[XVIII] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XIX] “Vanguard economic and market outlook for 2019: Down but not out”; Vanguard Research, December 2018.

[XX] “2019 Investment Outlook: Focus on the Fed”; Lord Abbett Market View, December 10, 2018.

[XXI] “Stock Buybacks by Sector”; First Trust: View from the Observation Deck, December 20, 2018.

[XXII]  “Stock Buybacks by Sector”; First Trust: View from the Observation Deck, December 20, 2018.

[XXIII] Francis, Theo “A Year In, some Lessons From the Tax Overhaul”; The Wall Street Journal, December 4, 2018.

[XXIV] Francis, Theo “A Year In, some Lessons From the Tax Overhaul”; The Wall Street Journal, December 4, 2018.

[XXV] “Vanguard economic and market outlook for 2019: Down but not out”; Vanguard Research, December 2018.

[XXVI] Otani, Akane “Bargain Hunters Bypass Stocks”; The Wall Street Journal, December 10, 2018.

[XXVII] “Putting technology stock’s volatility in perspective”; American Funds Capital Ideas U.S. Equities, November 5, 2018.

[XXVIII] “Putting technology stock’s volatility in perspective”; American Funds Capital Ideas U.S. Equities, November 5, 2018.

[XXIX] Wesbury, Brian S. and Stein, Robert “No Housing Bubble”; First Trust Monday Morning Outlook, December 17, 2018.

[XXX] Wesbury, Brian S. and Stein, Robert “No Housing Bubble”; First Trust Monday Morning Outlook, December 17, 2018.

[XXXI] “State Of The Economy 15: Why The Stock Market Is Wrong About A Looming Recession”; SeekingAlpha.com, Nov. 26, 2018.

[XXXII] “Prepare for (Soft) Landing”; Neuberger Berman Fixed Income Investment Outlook 1st Qrt 2019, December 2018.

[XXXIII] Wesbury, Brian S. and Stein, Robert and Elass, Strider “Dow 28750, S&P 3100”; First Trust Monday Morning Outlook, December 31, 2018.

[XXXIV] “2019 Investment Outlook: Focus on the Fed”; Lord Abbett Market View, December 10, 2018.

[XXXV] Nunn, Sharon “Consumers Continue to Drive Economy”; The Wall Street Journal, December 22-23, 2018.

[XXXVI] “The Fed: Timing is everything”; Legg Mason; Featured Insights/Market Snapshot December 21, 2018.

[XXXVII] Hilsenrath, Jon “The Economic Forecast for 2019: Less Growth, More Uncertainty”; The Wall Street Journal, December 4, 2018.

[XXXIX] “State Of The Economy 15: Why The Stock Market Is Wrong About A Looming Recession”; SeekingAlpha.com, Nov. 26, 2018.

[XXXX] “State Of The Economy 15: Why The Stock Market Is Wrong About A Looming Recession”; SeekingAlpha.com, Nov. 26, 2018.

[XXXXI] “State Of The Economy 15: Why The Stock Market Is Wrong About A Looming Recession”; SeekingAlpha.com, Nov. 26, 2018.

[XL] “The Fed: Timing is everything”; Legg Mason; Featured Insights/Market Snapshot December 21, 2018.

[XLI] “State Of The Economy 15: Why The Stock Market Is Wrong About A Looming Recession”; SeekingAlpha.com, Nov. 26, 2018.

[XLIII] Wesbury, Brian S. and Stein, Robert “The Long-Term Yield Conundrum”; First Trust Monday Morning Outlook, December 10, 2018.

[XLIV] “2019 Investment Outlook: Focus on the Fed”; Lord Abbett Market View, December 10, 2018.

[XLV] “2019 Investment Outlook: Opportunities in the New Year”; Lord Abbett Market View, December 17, 2018.

[XLVI] Mims, Christopher “Every Company Is Now A Tech Company”; The Wall Street Journal, December 4, 2018.

[XLVII] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XLIX] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XLX] “2019 Investment Outlook: Focus on the Fed”; Lord Abbett Market View, December 10, 2018.

[XXXVI] Wesbury, Brian S. and Gill, Bryce “Yellen Agrees with The Austrians”; First Trust Advisors Economics, December 13, 2018.

[XXXV] Ip, Greg “Trade War’s Impact has Been Minor. That Could Change”; The Wall Street Journal, December 4, 2018.

[XXXVI] Ip, Greg “Trade War’s Impact has Been Minor. That Could Change”; The Wall Street Journal, December 4, 2018.

[XXXVII] Mauldin, William “Trade Tests Loom in the Coming Year: The outcome will affect any company that has a significant international supply chain”; The Wall Street Journal, December 4, 2018.

[XXXIX] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[] “Disruptive Forces Seen Shaping 2019 Investment Landscape”; T.Rowe Price Insights, December 2018.

[] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[1] “Vanguard economic and market outlook for 2019: Down but not out”; Vanguard Research, December 2018.

[1] “Disruptive Forces Seen Shaping 2019 Investment Landscape”; T.Rowe Price Insights, December 2018.

[1] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[1] “Disruptive Forces Seen Shaping 2019 Investment Landscape”; T.Rowe Price Insights, December 2018.

[1] Wesbury, Brian S. and Stein, Robert “Retail Sales Rose 0.2% in November”; First Trust Data Watch, December 14, 2018.

[1] Wesbury, Brian S. and Stein, Robert “Personal Income Rose 0.2% in November”; First Trust Monday Morning Outlook, December 21, 2018.

[1] Wesbury, Brian S. and Gill, Bryce “Yellen Agrees with The Austrians”; First Trust Advisors Economics, December 13, 2018.

[1] Wesbury, Brian S. and Stein, Robert “Nonfarm Payrolls Rose 155,000 in November”; First Trust Data Watch, December 7, 2018.

[1][1] Wesbury, Brian S. and Stein, Robert “Existing Home Sales Rose 1.9% in November”; First Trust Data Watch, December 19, 2018.

[1] Chaney, Sarah and Kusisto, Laura “Home Sales Fall 7% from Year Earlier”; The Wall Street Journal, 12/20/2018.

 

[1] Wesbury, Brian S. and Stein, Robert “Housing Starts Increased 3.2% in November”; First Trust Data Watch, December 18, 2018.

[1] “Homebuilder-Related Stocks Hit hard by a Confluence of Events”; First Trust: View from the Observation Deck, October 25, 2018.

[1] Wesbury, Brian S. and Stein, Robert “The ISM Manufacturing Index Rose to 59.3 in November”; First Trust Data Watch, December 3, 2018.

[1] Wesbury, Brian S. and Stein, Robert “The ISM Non-Manufacturing Index Rose to 60.7 in November”; First Trust Data Watch, December 6, 2018.

[1] Wesbury, Brian S. and Stein, Robert “New Orders for Durable Goods Rose 0.8% in November”; First Trust Data Watch, December 21, 2018.

[1] Wesbury, Brian S. and Stein, Robert “The Industrial Production Rose 0.6% in November”; First Trust Data Watch, December 14, 2018.

[1] Wesbury, Brian S. and Stein, Robert “The Producer Price Index Declined 0.1% in November”; First Trust Data Watch, December 11, 2018.

[1] Some economists refer to the “soft landing” as an economy that slows without triggering a recession. 

[1] “The Fed: Timing is everything”; Legg Mason; Featured Insights/Market Snapshot December 21, 2018.

[1] Martini, Giulio “The Fed Downshifts Its Expectations ”; Lord Abbett Economic Insights, December 19, 2018.

[1] Martini, Giulio “The Fed Downshifts Its Expectations ”; Lord Abbett Economic Insights, December 19, 2018.

[1] Martini, Giulio “The Fed Downshifts Its Expectations ”; Lord Abbett Economic Insights, December 19, 2018.

[1] Martini, Giulio “The Fed Downshifts Its Expectations ”; Lord Abbett Economic Insights, December 19, 2018.

[1] Wesbury, Brian S. and Stein, Robert “Market Overreacts to A More Dovish Fed”; First Trust Research Reports, December 3, 2018.

[1] Timiraos, Nick “Central bank signals pace of increases could slow in 2019 amid economic uncertainty”; The Wall Street Journal, 12/20/2018.

[XCV] Wesbury, Brian S. and Stein, Robert “Scapegoating Powell”; First Trust Monday Morning Outlook, December 3, 2018.

[XCIV] Wesbury, Brian S. and Stein, Robert “Scapegoating Powell”; First Trust Monday Morning Outlook, December 3, 2018.

[XCV] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XCVI] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[XCVII] Turnill, Richard “Upgrading U.S. Government Bonds”; Blackrock Global Weekly Commentary, December 10, 2018.

[XCIX] “3 Key Takeaways from the U.S. Midterm Elections”; American Funds Capital Ideas U.S. Equities, November 9, 2018.

[C] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[CI] “U.S. Midterm Elections: Fundamentals Outweigh Politics in investment Outlook”; T.Rowe Price Price Point, November 2018.

[CII] Mahajan, Mona “With mid-terms over, markets may feel relief”; Allianz Global Investors: Capital Markets & Economics, November 9, 2018.

[CII] Mahajan, Mona “With mid-terms over, markets may feel relief”; Allianz Global Investors: Capital Markets & Economics, November 9, 2018.

[CIV] “U.S. Midterm Elections: Get Ready For Gridlock”; Lord Abbett Market View, November 7, 2018.

[CV] Mann, Ted “It May Be Time to Build Bridges: The Trump administration hopes to make good on its pledge to upgrade infrastructure”; The Wall Street Journal, December 4, 2018.

[CVI] Mahajan, Mona “With mid-terms over, markets may feel relief”; Allianz Global Investors: Capital Markets & Economics, November 9, 2018.

[CVII] “3 Key Takeaways from the U.S. Midterm Elections”; American Funds Capital Ideas U.S. Equities, November 9, 2018.

[CVIII] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[CIX] Morton, John J. “China’s Grand Bargain: Growth verses Deleveraging”; Lord Abbett Economic Insights, December 19, 2018.

[CX] Morton, John J. “China’s Grand Bargain: Growth verses Deleveraging”; Lord Abbett Economic Insights, December 19, 2018.

[CXI] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[CXII] “Outlook 2019: Long-term perspective on markets and economies”; American Funds Capital Group, December 2018.

[CXIII] Wei, Lingting and Davis, Bob “U.S. Digs In on China Talks”; The Wall Street Journal, December 10, 2018.

[CXIV] Wursthorn, Michael “Stocks Tumble As Trade Fears Jolt Investors”; The Wall Street Journal, December 5, 2018.