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Wealth & Pension Services Group
William Kring, CFP®
Chief Investment Officer
01/09/2019


Q4|2018 Portfolio Commentary

Portfolio Review

It’s hard to believe just one quarter has gone by since our last report. So much has changed. Or has it? Twice, I started writing to you in December with the hopes of trying to communicate what was happening. No sooner than I would write something, everything would change. So, with clearer hindsight, below are some of our thoughts.

As you may remember, the quarter began with strong growth and ended with the latest jobs report showing evidence of the same. But, in between, we had continuing trade concerns, signs of a possible China slow down, and market moving commentary from both the Fed and the President. And, let’s not leave out the government shutdown.

Stocks gave back all their 2018 gains in the quarter and a good chunk from 2017. The year also proved unusual in the exceptionally high number (90%) of asset classes that were negative for the year. For perspective, a somewhat diversified mix of the S&P and EAFE (70%/30%) was down 7.2% for the year. The MSCI world index was down 8.9%. If small and mid-cap stocks were added in, the performance was down further. Commodities were down 11%. Bonds were at least flat but provided no real offset to the poor equity performance. We were not immune, with portfolios down mostly between 5% to 8%, depending on levels of risk.

As it seems to be happening more and more during corrections, computers do much of the damage. Only when stocks get cheap enough, do human buyers and computers start buying. And so, hopefully, Christmas Eve was the bottom, and we can start a path back to fundamentals. The Fed created a stir with their last testimony, which some would say was a big part of the sell-off. But, just recently, Chairman Powell gave the market some comfort with new comments about “getting it” (my words), meaning we may not need more tightening.

As we experience market corrections, it’s easy – and human nature – to compare the “now” to the recent highs. Markets go up more than they should, and they go down more than they should. We may have experienced both over the last three months. The bottom line is that anyone investing in a diversified portfolio over the last three years, even after the correction, handily beat bonds, and trounced cash. So, where we sit today, is the best we could do. Feeling better? I hope so.

Looking Forward

Getting back to fundamentals…earnings predictions have come down but are still expected to be up over last year. The Fed, for now, seems accommodative. Bond yields are lower, so they are less competition for stocks. Stock valuations improved, and dividend yields are higher. So, it really comes down to the following questions. Is the economy slowing down with a recession coming, or are we still growing? And if we were growing, was the Fed going to ultimately cause a recession with too much restraint, which they may now be taking back? Certainly, China and trade are big factors in these questions. Re-opening the government, wouldn’t hurt. For now, in the absence of any actionable data, it’s too early to worry about recession. As more data comes in, and with some clarity on trade, we will be making adjustments to portfolios.

Finally, up markets never test our risk tolerance (only our desire for more gains), but corrections always test our risk tolerance (and our loathing of perceived losses). If we need to adjust your portfolio for your “updated” risk tolerance, please let us know.

William Kring, CFP®
Chief Investment Officer



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