Broker Check

December 17, 2018

| January 03, 2019
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Holidays can be joyful and a little stressful. Here are a few ways to bring a moment of happiness into your life and the lives of those around you:

⦁ Take time to call an old friend.
⦁ Buy coffee for a stranger.
⦁ Briefly chat with your next cashier.
⦁ Invite an older neighbor to dinner.
⦁ Leave a nice tip for your server.
⦁ Sing out loud


Thank you for entrusting us with your investment and financial planning. We wish you good health, happiness, and friendship in the coming new year.
Happy Holidays!

THE MARKETS

It never feels good when the stock market declines, and that is what has happened since October. The Standard & Poor’s 500 Index (S&P 500), Dow Jones Industrial Average, and Nasdaq Composite all moved into correction territory last week, which means the indices have fallen 10 percent or more from their previous peaks.


If you look at corporate earnings, the decline in U.S. stock values may seem a bit unusual. During the third quarter of 2018, almost four-fifths (78 percent) of companies in the S&P 500 were more profitable than analysts expected, according to FactSet Insight. Earnings grew by 25.9 percent – the fastest growth rate since 2010.


So you might ask why the stock market is falling as earnings are reaching new highs. The chart below shows how though earnings have grown (data through 10/30/2018), they have been more than offset with a 20% decline in the price to earnings multiple. Simply stated, the P/E multiple is how much investors are willing to pay per $1 of earnings power. This multiple tends to fall when investors believe earnings in the future will be lower than they are today and also when interest rates rise.


So, what moved the market last week? Investors’ concerns included slowing global economic growth. Dave Shellock of Financial Times reported:

“World equities closed out the week on a soft note as disappointing economic reports out of China and the eurozone heightened concern over the outlook for global growth…the big focus was on China, where activity and spending data confirmed that the country’s economy had a dismal November.”

Monetary policy and geopolitical issues, including the possibility of a U.S. government shutdown and ongoing Brexit follies, contributed to investor pessimism. The American Association of Individual Investors Sentiment Survey showed a 17-point decline in bullish sentiment and an 18.4-point increase in bearish sentiment.

When stock markets leave you feeling uneasy, it may be helpful to remember the words of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”

ECONOMIC AND POLICY UPDATE

Three sets of meetings, and the announcements that follow, will likely drive markets through year-end. Continued volatility may occur due to progress, or bad news. The first is the Federal Reserve’s December 19 meeting on interest rates. As expected, the Fed decided to raise interest rates ¼% to 2.25% but communicated that rate hikes will likely slow next year. The Fed has raised interest rates 4 times in 2018 and nine times since 2015. This marks a change from the zero-interest rate policy in effect from 2009-2015.

The Fed continues to hint that future interest rate increases will be “data dependent”. However, this has not been the case during 2018, as inflation expectations have declined and yet the Fed has continued to raise short-term interest rates and remove credit from the system through quantitative tightening. Currently, the Fed is reducing its balance sheet by $50 billion per month (out of approximately $4 trillion) and there has been no indication that this could change moving forward.

Stock markets were hopeful that the Fed would pause raising interest rates. Federal Reserve Chairman Jerome Powell did not meet this expectation even though his tone was a bit softer. The Federal Reserve members now estimate two interest rate increases in 2019. This is down slightly from prior Fed expectations but is still more than markets anticipate.

The markets have been very volatile since the beginning of October due to concerns over tariff issues/possible trade war and the Fed’s path of future interest rates. Since the start of October, there have been 44 trading days (81% of all trading days this quarter) where the Dow Jones Industrial Average has had an intraday move of at least 250 points (up or down approximately 1%). We continue to watch the economic and policy headlines that are moving the markets day to day. We are also focused on the underlying economic data which continues to be mostly positive, including corporate earnings. We expect markets will continue to be volatile into 2019.

The second set of meetings centers on the United States-China trade negotiations. Because of frequent signs of progress, followed by failures, investors have become more cynical regarding announcements from either party. Even though there are signs the talks are progressing, markets are waiting to see firm signals of progress or a deal. The accompanying chart shows the pressure on China is mounting. Industrial output grew at the slowest pace it’s seen in four years as trade pressure reduced manufacturing. These negotiations have continued to fare poorly, but both sides have an incentive to reach a truce that includes the framework for a final trade deal.

The third set of meetings encompasses the negotiations around Brexit. British Prime Minister Theresa May survived a “no confidence” vote last week but faces a delicate set of negotiations to get both the British Parliament and European Union (EU) to approve the same deal. The final outcome for Brexit is anybody’s guess. The near-term economic interests for all parties are for a deal, but the EU doesn’t want to make it easy to leave, and British politicians will be loath to sacrifice their careers signing on to a bad deal.
For each of these issues, the market will likely react more favorably to a pretty good long-term solution compared to a short-term truce. Economies are slowing because companies can’t make strategic decisions. Long-term predictability will likely benefit economic growth even if the solutions aren’t ideal. 

Key points for the week
⦁ The S&P 500, including dividends, has now declined more than 10 percent from its previous high. 
⦁ Weak economic data out of China and other regions put pressure on the market. 
⦁ The Federal Reserve, United States-China trade negotiations, and Brexit discussions will likely move markets this week. 


What are we READING?

Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.

Circle K Glitch Offers Gas for 2 Cents a Gallon
Circle K gas stations discovered a large influx of people pulling in for gas at multiple locations last week. Turns out a computer glitch set gas prices at 2 cents a gallon. The price break allowed some customers to fill up for just 30 cents. An early Christmas gift indeed. 

Tax Credit for Buying a Tesla
Under the Federal income tax code, buyers of qualified plug-in electric vehicles can receive a Federal income tax credit until the total number of qualifying vehicles sold reaches 200,000. Tesla reached this limit during the 3rd quarter of 2018. This means that buyers who purchase a Tesla prior to 1/1/2019 will receive the full credit. The credit will begin to phase down starting in 2019 and will be eliminated after 12/31/2019.

WHEN THE HOLIDAYS ARE JUST TOO MUCH.
Around the holidays, it’s easy to become stressed and overwhelmed. Psychology Today offered some suggestions that may help you stay merry and bright, no matter what the season brings.
Don’t lose sight of what makes you happy. It’s easy to become obsessed with everything being perfect. If you find yourself snapping because the shopper next to you got the last one, the holiday light display is sagging, or the table isn’t set just right, take a deep breath. True happiness often is found in everyday routines and healthy relationships. 
Give thanks for what you have. This seems like a natural corollary to point number one. Instead of focusing on what’s not quite right, redirect your thinking. Sure, your great aunt’s stories are inappropriate, and the mashed potato incident wasn’t great, but there are some good moments, too. If you can, find time to write down the things for which you are grateful to have in your life. Then, review it as needed.
Do nice things for other people. Not everyone has a warm coat, much less a warm home and a patience-trying holiday meal. Giving to others can help give meaning to the season. You could donate to a favorite charity, help out at a food pantry or a shelter, or visit elderly neighbors. One of the very best aspects of giving is that it can make us happier.
Embrace experiences. If you want to have a memorable holiday, don’t buy lots of gifts. Give experiences. Happiness research suggests, “…happiness is derived from experiences, not things…when they are shared, experiences allow us to get closer to others in a way impossible with inanimate objects that we can buy,” reported Paul Ratner on BigThink.com.

Weekly Focus
"My attitude is never to be satisfied. Never."
   ~ Bela Karolyi, Olympic gymnastics coach

“…in Racine, Wisconsin: The Santa at [the mall] knows sign language. He signs with kids who are hearing impaired, so that he can ask them – and they can tell him – what they want for Christmas. Because the warm fuzzy feelings of the holidays don’t just come from getting the right present – they come from feeling like part of a loving, inclusive community.”
~ MentalFloss.com

“Excellence is an art won by training and habituation."
                         ~ Aristotle, Philosopher 

"If you have no critics you likely have no successes."
             ~ Malcolm Forbes, publisher

Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice. 

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Keep in mind that there is no assurance that any strategy, including diversification and asset allocation, will ultimately be successful or profitable nor protect against a loss. Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal.  The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal.  Please note direct investment in any index is not possible.

The NASDAQ Composite Index is an unmanaged index of securities traded on the NASDAQ system.The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.  Investing in emerging markets can be riskier than investing in well-established foreign markets.

The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investors Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.
  
Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.


https://finance.yahoo.com/news/u-stock-market-officially-correction-001801781.html
https://www.investopedia.com/terms/c/correction.asp
https://insight.factset.com/earnings-insight-q318-by-the-numbers-infographic
https://www.investopedia.com/articles/economics/08/leading-economic-indicators.asp
https://www.ft.com/content/cb5ddff4-ff45-11e8-ac00-57a2a826423e
https://www.ft.com/content/1d218d08-ffb5-11e8-aebf-99e208d3e521
https://www.aaii.com/sentimentsurvey
https://www.goodreads.com/quotes/29255-be-fearful-when-others-are-greedy-and-greedy-when-others
https://www.psychologytoday.com/us/blog/the-mindful-self-express/201412/how-find-peace-and-happiness-holiday-season
https://bigthink.com/paul-ratner/want-happiness-buy-experiences-not-more-stuff
http://mentalfloss.com/article/90086/20-heartwarming-stories-will-brighten-your-holiday-season

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