1. Market Perspective – December 2018
Experience Insight Impact
Overview: “Uncertainty” has become a widely used word these days. In fact, between political
uncertainty, Federal Reserve uncertainty, earnings uncertainty, currency uncertainty (and more),
investors are awash in negativity. Markets detest uncertainty. This month, we frame the current
state of the markets with a historical viewpoint. In addition, we update some of the critical market
concerns such as the current interest rate environment and Federal Reserve policy.
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2. Under The Surface…
Experience Insight Impact 2
Through December 17th, the market has already been hit very hard, with 9 of 11 sectors in correction
territory and many large companies already in “bear market territory.”
Source: FactSet and Marketwatch
3. Under The Surface…
Experience Insight Impact 3
• 2018 has proven to be a rare year where
virtually every asset class is below the
flat line (as of 12/20). However, one
takeaway is that more often than not,
asset classes have some mean reversion
over longer periods of time.
• As an example, after several years of
poor performance in Emerging Market
equities, this asset class outperformed
in 2017.
• This historical perspective demonstrates
the importance of a well diversified
portfolio, which by definition will have
various asset classes with lower
correlations.
4. Prior Corrections
Experience Insight Impact 4
• While declines of the
current magnitude are not
overly common, they do
occur somewhat regularly.
• This graphic from
Vanguard demonstrates
that we see events like
this every few years.
• After several years of
subdued volatility, Q4
2018 saw the dramatic
return of it.
• Throughout history,
volatility has generally
been associated with
opportunity for well
diversified long term
investors.
5. Federal Reserve Update
Experience Insight Impact 5
As expected, The Federal Reserve (“the Fed”) raised interest
rates by ¼ of a point at its December 19th meeting.
Despite Chairman Powell commenting on the Fed being “data
dependent,” his tone was perceived by market participants to
be overly aggressive for future rate increases. Data
dependence implies the path of increases are uncertain and
will depend on what the economic data demonstrates.
Global growth is perceived to be slowing, although the Fed
sees a healthy U.S. economy & slightly below trend inflation.
Market participants, as noted in the chart above, do not expect
more than one more rate increase over the next year, although
the Fed indicated we may have two increases (again stating
that the path will be data dependent). Source: Bloomberg
6. Why Global Trade is a Concern
Experience Insight Impact 6
• Many of the largest U.S. companies were
built and grew within the global trade
regime, which existed over decades.
• According to S&P Global, 43.6% of the S&P 500 sales are foreign sales
(i.e. products or services produced and sold outside of the U.S.). S&P
states that this is a starting point to provide a glimpse into the global
composition of U.S. companies.
• While the announced tariff threats from both U.S. and China are
relatively small in relation to global GDP, companies in the U.S. and
abroad rely heavily on global operations to run their businesses,
which in the short run creates more uncertainty as policy is reshaped.
7. Market Perspective – December 2018
Experience Insight Impact
Conclusion: With uncertainty prevailing, markets around the world have declined dramatically.
Corrections are a normal part of market cycles, but each correction is different in nature. That being
said, we are cautiously monitoring the current environment for signs of policy and economic change
to put certain parts of the uncertainty to rest.
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8. Disclaimer
Experience Insight Impact
Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.
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