A Year Ends And Another Begins

The question most asked this time of year is, "What’s our forecast for the equity market in 2019?" While no one has a crystal ball, I’ve compiled some of our thoughts in addition to sharing a few from our investment partners. I can’t emphasize enough that the most important first step is to have a comprehensive plan in which your investments are one of many components that all work together to help you successfully achieve your long-term financial goals.

Below is a picture of asset class returns for the last 15 years ending in November of this year. As illustrated, no one asset class is always the best performing every year so a well-constructed, diversified portfolio is the best way to achieve your goals. It’s not surprising to note that most asset classes struggled in 2018.


Equities

Volatility returned to the equity markets in 2018 after the historically low experience in 2017. In fact, this past year saw two 10% declines for the first time since 1990 [1]. As of this writing all major markets indices are down for the year after experiencing a strong start to 2018.

Earnings growth in 2018 in large part can be attributed to the tax cuts put in place at the end of 2017. The market's price to earnings ratio was very elevated at the end of 2017 so despite strong earnings growth this year leading to a lower ratio, we are still at higher than historic norms. The consensus is that earning will continue to increase for the near future while dividends yields for 2018 also showed an increase from the prior year.


Investors should prepare themselves for more market volatility and lower returns. However, we view these inevitable drawdowns, when they do occur, as positive events for long term investors as new opportunities will present themselves.

Fixed Income

Fixed income also struggled this year. The Federal Reserve raised interest rates four times in 2018 and suspended its purchase of US treasuries and agencies [2]. These actions caused interest rates to rise and bond prices to fall. The Barclays Aggregate, which measures all debt in the USA, had lost 1.45% as of mid-December. And the current inverted yield curve, where short maturity bonds pay more than longer maturity ones, can be a signal that the economy is slowing.


Some analysts are forecasting the Federal Reserve will raise short term interest rates another three times next year. If this does take place longer dated bonds may lose value while the higher interest rates would not compensate for that loss. We favor keeping bond allocations but favor shorter duration securities due to the risk of a much slower growth economy. One positive result of higher interest rates is cash is becoming more of an investment option as a component to portfolios due to money market fund rates approaching 2%.

Foreign Equity Markets

Developed Foreign Equity Markets struggled more than the US in recent years, but continue to be cheaper than the US. Below is a graph showing the return of the S&P 500 versus the All Country World Index ex US (ACWI Ex US) since January 2010. The S&P 500 has returned 137% while the ACWI ex US has returned 9.6%. The ACWI Ex US has a price earnings ratio of 12.9 as compared to the S&P 500 at 19.7. This makes a compelling case for including a foreign component to a clients overall investment portfolio.

Emerging markets also struggled in 2018 after being the best performing asset class in 2017, with a loss as measured by the MSCI emerging markets index of negative 15%. This occurred for several reasons including tariff wars, the strength of the US dollar, and falling commodity prices. Below is a graph showing the difference in returns for various countries between 2017 and 2018 in US Dollar terms. All investors should have some exposure in emerging markets as it is a great diversifier and where the largest percentage of growth is occurring.


Additional Reading

Below is information form our various partners and what their thoughts are on the year ahead


US OUTLOOK: AGING ECONOMIC EXPANSION STILL FLEXING ITS MUSCLES FROM AMERICAN FUNDS


INTERNATIONAL OUTLOOK: ARE WE NEARING PEAK PESSIMISM? FROM AMERICAN FUNDS


CYCLICAL OUTLOOK: SYNCING LOWER FROM PIMCO


THE INVESTMENT OUTLOOK FOR 2018: LATE CYCLE RISKS AND OPPORTUNITIES FROM J.P. MORGAN


2019 INVESTMENT OUTLOOK FROM GOLDMAN SACHS


INSIGHTS FROM INVESCO


If you want to discuss further please feel free to email info@blackdiamondwealth.com or

call (212) 328-1762.

1. A wealth of Commons Sense https://awealthofcommonsense.com/2018/12/the-one-constant-in-the-stock-market/

2. USA Today https://www.usatoday.com/story/money/2018/12/19/fed-decision-interest-rates/2306246002/

The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, The index is widely regarded as the best single gauge of large-cap U.S. equities.


The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq.


The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange.

MSCI Emerging Markets Index stands for Morgan Stanley Capital International (MSCI), and is an index used to measure equity market performance in global emerging markets.


The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks.


The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada

Disclosures:

BlackDiamond Wealth Management, Inc. (“BlackDiamond”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where BlackDiamond and its representatives are properly licensed or exempt from licensure.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Past performance in not indicative of future returns, which could differ substantially. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. You cannot invest directly in an index.

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