The fourth quarter of 2018 did not provide the year-end rally many investors were hoping to experience. The markets were rattled by a trio of events – higher federal funds interest rates, continued trade war and tariff escalation between US and China, as well as a government shutdown.

Looking at the major indices’ quarterly returns, the S&P 500 was down 13.52%, the Nasdaq was down 17.29%, the MSCI EAFE (international developed market stocks) was down 12.54%, and the MSCI Emerging Markets Index was down 7.40%. On the fixed income side, the Barclay’s US Aggregate Bond Index gained 1.64% for the fourth quarter, while high-yield fixed income was down 4.53%.

In contrast to the equity and bond markets, the economy still appears relatively robust, with very low unemployment, increasing labor participation, and increasing wage growth. Moreover, the GDP growth in 2018 was the largest since 2005, and estimated earnings growth rate for the S&P 500 in the fourth quarter is approximately 12.4%. The juxtaposition between a volatile stock market and a strong economy may continue, and emphasizes the value of a well-diversified portfolio in order to stay the course.

In the beginning of the first quarter of 2019, we will be rebalancing the IEM Investment Advisory Portfolios. A systematic rebalancing strategy is an important part of an investment plan, as a portfolio may ‘drift’ away from its target allocations over time. The idea of strategic rebalancing as a value-add is that you are buying assets that are down and selling assets that are up, maintaining target allocation.

Additionally, we take the rebalancing periods as an opportunity to identify changes in the risk/reward landscape of assets and position the portfolios accordingly. In the past year, we made prudent tactically-defensive adjustments (increased Treasuries, reduced junk bonds, increased Value stocks). After the decline in Q4 2018, the risk/reward has improved moderately, allowing small tactically-offensive adjustments (increasing small cap stocks, emerging market stocks, and REITS). Finally, we replaced intermediate treasury bonds with short-term treasury bonds due to the flatter yield curve.

As always, we encourage you to call us or to use our on-line client portal ( ) to confirm that your portfolio’s allocations match your need, ability, and willingness to take risk. We remain committed to our investment philosophy of well-diversified portfolios, being tax efficient and fee sensitive, as well as providing comprehensive financial planning.


Daniel Schoenecker, CFA

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.