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Steve's January 2019 Newsletter

Last month was the worst December for stocks since the Great Depression over 80 years ago! The S&P 500 index was down 13.4% in the last quarter and ended 2019 negative for the first time since the end of the global financial crisis over a decade ago.

Even though stocks have cratered over the past quarter, I still do not see a recession as "immediately" imminent or a repeat of something like the financial crises of 2007-2008. That crisis was a function of two separate parts: First was a gigantic housing bubble, with an exotic debt structure, and a leveraged global financial system; which took down the entire global economy!  That caused part two, the 2007 Great Recession. I just don't see that type of toxic economic mix in 2019!

In 2019 the markets will continue to be extremely volatile in both directions. The US economy should continue to grow, but at a slower rate. The possibility of a recession in the future, which is a normal part of the business cycle, has increased as a decline in business and consumer confidence risks becoming a self fulfilling economic prophecy. It seems that the Federal Reserve and the Presidents' trade war with China hold the keys to either a gentle or an extreme glide path into the eventual next recession.

I expect 2019 to be a positive year, but not great! Last year I predicted a positive 7%. So much for crystal balls!

The positive that comes from the recent market selloff is that equity valuation levels are more attractive now than they were just a few months ago. The S&P forward price-to-earnings ratio that was at a high 18.3 in September now standing at roughly 15.

Market sentiment is also extremely negative which usually means that a short term bottom "might" be near. How is that for making lemonade out of lemons!

Corporate earnings season starts soon. However, it will not be last quarters earnings that count as much as what companies say about future expectations. I believe the markets figured out early in October 2018 that companies were building inventory and making purchases in advance of additional 2019 tariffs, thereby stealing profits from 2019. Late year investor tax loss selling also was extreme.

Not on the radar screen yet is the departure of the United Kingdom from the European Union in March. That may result in a continued slowdown of the global economy.

It can be difficult to remain calm in the midst of stock market action like we’ve seen over the past several months. Regardless of what happens in the markets or the overall economy, try not to react emotionally to political and market volatility. Sadly, it has become the norm! If you do want to discuss or reassess your long term goals or risk tolerance, I am always here to help guide you!


Steve Newman