The equity markets’ negative returns, and the large negative sentiment, have been driven by a fear of Chinese trade issues, Federal Reserve policy issues, and now the market’s downside, we believe, has all but burned itself out. Irrational market panics, like this, are not historically uncommon, but have ultimately always resulted in large, positive, upside movements. While some tax law selling could fuel some slight downside pressure in these last waning days of 2018, we believe our equity market positioning, and overall portfolio structure, is well situated to provide your portfolio significant returns in the first half of 2019. Let’s cover six main catalysts for a great 2019!
#1 – Change of Federal Reserve Policy
The Federal Reserve has already, in writing, clearly reduced interest rate hike expectations for 2019 and, we believe, are likely to also taper off on future bond sales designed to reduce the Federal Reserve’s balance sheet. Both of these events would decrease monetary pressure on the economy, give it more room to breathe and grow, and lead to greater market stability and returns.
#2 – China Trade Settlement
The much-discussed trade deal with China, which has caused tremendous market sentiment damage, should be resolved before our nation’s “hard deadline” of March 1, 2019. The Chinese, believe it or not, are experiencing much greater economic damage and a much higher level of market decline than our markets. They are also now being pressured, thanks to the administration’s policies, by our European trading partners, and others, about their past, and present, unfair trade practices. This allied piling-on effect should result in a settlement sooner than the March 1st deadline. When the Chinese issue is settled, a much more prosperous period of U.S. and world economic growth, unhampered by China’s intellectual property thefts and forced technology transfers, should result. This will be a great economic stimulus event for many decades to come. Importantly, this agreement is extremely likely to precipitate a large, upside move in your holdings.
#3 – January 2019 – Expect Positive 4th Quarter Earnings Reports
Fourth quarter 2018 earnings announcements will begin in early January 2019 – just a week from now! We expect the reports to be very positive overall and, to drive up valuations as investors realize that a large economic slowdown is very unlikely! Moreover, we believe these reports will provide clear evidence that recession is definitely not in the offing.
#4 – Infrastructure Plan
There is clear bipartisan support for a large scale, national infrastructure project that repairs our roads, rail, and bridges – resulting in significant improvements of our nation’s growth and also providing a very large shot in the arm to our current economy. With a Democratic House majority being seated in early January of 2019, both parties would then be able to take credit for the passage of an infrastructure project in 2019. I state, unequivocally, that this project could provide a very large economic stimulus and ongoing, significant economic growth benefits due to higher national productivity, job, and wage growth.
#5 – Peace Dividend – Finally!
A study at Brown University put the cost of war in Iraq, Afghanistan, Pakistan, and Syria at nearly $6 trillion since 2001. Thanks to the efforts of our current presidential administration in changing the rules of engagement to allow our sons and daughters to seek out, and fire first, on opposing forces, we have decimated ISIS and Al-Qaeda terrorists. Now, the common-sense policy of reaping a peace dividend by withdrawing from those areas of conflict is being criticized and condemned. Speaking from a retired military officer’s perspective, I am 100% supportive of this policy and am very happy to see as many of our troops to come home as possible. Just as I believed, and supported, President George W. Bush’s decision to destroy the Taliban following 9/11 and then to take out Al-Qaeda, I also support, since those efforts have been largely and successfully achieved, leaving these problematic countries and governments and simply saying “Don’t make us come back!”. Our nation’s children do not, any longer, need to worry about maintaining the oil supply from the Middle East due to Trump administration policies, we have unlocked the mother-load of energy production domestically and are a net energy exporter – instead of continuing a national policy of being tied to OPEC’s exploitive demands. Since we no longer need Middle East oil to power our nation, we also do not need to engage in conflicts in that region to keep those pathways open. There is no vital strategic interest for the U.S in maintaining that exposure. While the $6 trillion figure looks large, please note that the study at Brown University does not include any costs to state and local governments to care for our wounded veterans and their families. America should now recognize this peace dividend and not attempt, as we have in the past, to nation-build in areas of the world where civilizations existed thousands of years before our own. We need to stop putting our troops in harm’s way after obliterating the enemy threat. Staying longer leads to the same problems we have faced in Afghanistan, Iraq, and Syria. Leaving does not imply we give terrorists safe harbor because we now have significant assets in the region and can go back in quickly. Our technological advancements in the area of drones, special forces assets, and quick reaction forces do not make basing in these countries a requirement. Simply put, our mission has only now been accomplished and the enemy is aware that if they reconstitute, we will be back!
#6 – Economic History
Throughout our nation’s economic history, following corrections of the magnitude we have already experienced (especially those disconnected with economic growth, i.e. October 1987’s two-day, 25% decline), large reversals to the upside are normal and consistent. That historic fact and trend should lead to well above average equity price movements in the first half of 2019 that, we believe, will erase this year’s abysmal results, and lead to above average future appreciation!
Our markets have experienced a significant correction that is not correlated to our nation’s dynamic, underlying economic growth and progress. These declines are not unusual and happen occasionally due to political or emotional events. Sometimes, short-term economic pain needs to be experienced for long-term economic gain. We believe the seeds have been sown for a much longer lasting economic recovery than the market currently expects. We project that 2019 is very likely to be a well above average period of market returns and that the losses of 2018 are likely to be erased in the first half of 2019 with subsequent gains after that point. It is easy to look at these things emotionally. Taking a longer term, factual, and historical perspective will not only lead to greater long-term profits, gains, and principal protection, but it will also allow you to enjoy the wonderful life you have built for you and your family without unnecessary heartache and worry.
The hardest part of my job over these past 31 years is trying to make sure that you do not unnecessarily become burdened with the task you compensate our firm to accomplish for you. Your principal protection is job number one and we are never happy to not satisfy those goals. But we are certain that this too shall pass and that a much brighter economic future shortly awaits us all. The pathway of history is progress. With an American government advocating for American interests, for the first time in many decades, we believe continued progress and economic growth is a near certainty. Please give me, or any of our staff, a call if you would like to discuss issues that have not been covered in this letter. We hope your family had a wonderful Christmas, a happy Hanukkah, and the greatest new year of your lifetime.
C. Kelly Buckley, MBA, CFP
Managing Director for Asset Management
Integrity. Commitment to Service. Standards of Excellence.
Spectrum Financial Alliance, Ltd., L.L.C (“Spectrum”) is a Registered Investment Advisor. This letter contains general information that is not suitable for everyone and should not be construed as personalized investment advice. Past performance is no guarantee of future results and there is no guarantee that the views and opinions expressed in this letter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. If your financial situation or investment objectives have changed or if you want to impose and/or modify any reasonable restrictions on management of your accounts, please contact our office at 859-223-6333.