Registered Investment Advisor
900 Walt Whitman Road, Suite 208
Melville, NY 11747
 (631) 923-2485
Investment Newsletter - Q1 2019

Welcome to 2019! What kind of year will this be, particularly in the world of investing? That is a good question. 2018 was the first year since the financial crisis of 2008 that experienced a significant downturn in the stock market, and that was felt across the board: in U.S. stocks and bonds, as well as internationally. It is good to remember that 2008 was the worst financial markets since the Great Depression, and with hindsight, it is obvious that even when it looks dour, keeping focused on a long term of at least 5-10 years, that gives significant time for markets to not only recover, but move forward.

We give more detail on it further below. There are two articles that may also be of interest. The first is from AMG Funds: Keep Calm and Remain Diversified .

The other is a 2019 Investment Outlook from American Century.

In this issue of our Investment Newsletter:

  • An overview of recent market activity, along with Our Perspective...

  • Our current investment topic is: Real Estate Investment Trusts: Public vs Private 

  • A recap of the performance of major market indices from the past quarter and for 2018. 

  • Investor's Manifesto (a quick, timely read)

  • Upcoming Economic Calendar

You will find past investment articles, by clicking the Articles tab above, or directly on our website, found under Periodicals. 

If there is a topic of interest you would like to see covered in the future, please reply back to this email to let us know, or  click here . Likewise, if you have any questions on this or anything else, feel free to reply back.
Investment Topic

Real Estate Investment Trusts: Public vs Private

For our investment topic, "Real Estate Investment Trusts: Public vs Private" we attempt to give a high-level overview of the topic. To learn more, please  click here
Our Perspective on Recent Market News and Activity
Our synopsis of the past quarter, a look ahead, and putting it all in perspective:
As we exit 2018 and enter into 2019, two words come to mind, “Good Riddance”. 2018 was a year that started with great promise due to new tax reform and strong corporate earnings that were really going to allow for stocks to continue to run. Instead what we saw was a rolling Bear Market, which ended with the Grinch stealing any type of hopes for a Santa Claus rally in December. 

A review of the price returns (as opposed to total returns) for the year was not pretty, with not many winners: U.S. Treasury 3 month T-Bill +2.02%, and many losers: Barclay’s US Aggregate Bond Index down -2.97%, Barclay’s Municipal Bond Index down -2.91%, Dow Jones Industrial Average down -5.63%, S&P 500 Index down -6.24%, Russell Mid Cap Index down -10.64%, Russell 2000 Index (Small Cap stocks) down -12.18%, MSCI EAFE (International stocks) down  -16.14%, MSCI Emerging Markets down -16.64%, Bloomberg Commodity Index down -12.99%, DJ US Select REIT Index down -8.02%.  As you can see there were not many places to hide and the traditional benefits of diversification did not give support or relief during what turned out to be a punishing 4 th Quarter in 2018. 

In his recent notes on the market, J.P. Morgan’s Dr. David Kelly had the following thoughts on, “The Investment Implications of the Stock Market Swoon”:

Every stock market correction is different, but the equity market swoon of the fourth quarter of 2018 seems particularly unusual in the disconnect between the fundamental forces driving markets and the change in markets themselves.
Between September 28th and Christmas Eve, the S&P500 fell by 19.3%. Over the same period, the Fed raised interest rates for the fourth time this year, trade tensions with China ebbed and flowed, U.S. economic data were mixed and global data were soft, the Democrats took the House but not the Senate, the U.S. saw another partial government shutdown and the White House saw significant personnel turnover. But in truth, while there were plenty of events, these events were largely predictable and don’t seem, even in retrospect, to be sufficient to explain the stock market slide that occurred. More likely, the size of the decline reflects the growth of momentum trading and the impact of thin liquidity around the holiday season.

But if fundamentals didn’t move the market, did the movement in markets itself change the fundamental backdrop? In some important ways, I think it did. Some of these ways are negative.

First, there is a wealth effect. With one day left in the trading year, the S&P500 stands at 2,486. If it ends at this level, we estimate that household net worth will have fallen by $2.6 trillion or 2.4% in the fourth quarter. However, it should be noted that this would still leave net worth up 3% for the year due to gains in housing and other financial assets.

Second, there is a confidence effect. The Conference Board’s Index of Consumer Confidence fell from 137.9 in September to 128.1 in December and will likely lurch down again in January, reflecting the stock market turmoil right at the end of the year. However, the impact of the market swoon on confidence may be a little suppressed by the time of the year. Over the holiday season, most Americans probably spent less time watching financial news channels and many on-the-ground drivers of confidence like mall traffic, low gasoline prices and help-wanted signs remain strong. We will obviously have a better sense of this within a few weeks.

However, from the perspective of those considering new investments in U.S. stocks, some of the impacts of the market swoon are quite positive.

First, oil prices have fallen further. While much of this probably reflects supply issues for oil itself, some is probably due to the general “risk-off” sentiment in markets. The price of West Texas Intermediate Crude fell from over $75 a barrel at the start of October to under $43 by Christmas Eve and still hovers in the mid-40s today.

Importantly this has cut the average price of gasoline from almost $3 a gallon last summer to roughly $2.40 today, a price that should be sustained at least through the winter months. While hurting energy company profits, this should bolster consumer confidence and discretionary income and result in lower headline inflation. In fact, because of the oil price slump, year-over-year headline CPI inflation could fall below 2% in December, track down to 1.4% year-over-year by February and not recover to 2.0% until December of 2019.

Second, 2019 is likely to see a significantly more dovish Fed than seemed likely even three months ago. In September, the Fed was forecasting one more rate hike in 2018, three rate hikes in 2019 and a last rate hike in 2020, bringing the federal funds rate to a range of between 3.25% and 3.50%, somewhat above their 3.0% estimate of the long-term equilibrium rate. In December, while they raised interest rates by 25 basis points as expected, they cut this long-term equilibrium rate to 2.8% and removed one of their projected rate hikes for 2019.

Moreover, they are now less likely to do even this for three reasons. First, they presumably had not anticipated the violent reaction of markets to the December rate hike and will be nervous to upset markets again. Second, lower oil prices means inflation will now likely hover below the Fed’s 2% year-over-year consumption deflator target for at least the next year. Third, if the principal argument in favor of higher rates at this stage is preventing asset bubbles, the slide in stock prices seems to make that task less urgent. At the end of last quarter, we were penciling in two Fed rate hikes in the first half of 2019 before a pause, boosting the federal funds rate to a range of 2.75%-3.00% with the 10-year Treasury yield topping out at 3.50%. Now it seems reasonable to expect one more rate hike, at most, with 10-year Treasury yields only rising to 3.25%.

Finally, there is the issue of stock prices and valuations. At the end of September, the S&P500 was selling at 16.8 times forward operating earnings, about 4% above its 25-year average of 16.1 times. By this morning, the index is selling at 14.3 times, about 11% below its 25-year average. By simple math, if, in 5 years’ time the market is selling at 16.1 forward earnings, investors putting money in stocks today could expect 3% per year greater returns than they could three months ago. Of course, all of this assumes that the market swoon does not signal a significant deterioration in the U.S. economy”.

So where does that leave us heading into 2019? Opinions across the board are fairly divided between the Bulls and the Bears. Many feel that the recent sell-off was strongly overdone and as Dr. Kelly mentioned that with the S&P 500 selling at 14.3 times forward operating earnings, the market has already priced in a slowing economy. Others feel that not enough pain has been felt yet by the market and we may still have to re-test the recent market lows or even lower to finally reach a point of “capitulation”. Our response to all of this is that what we have been experiencing, while never fun by any stretch, is how markets normally operate. So in order for markets to eventually move back higher and eventually set all time new highs, we must go through these periods of volatility to get there. That is why investing should always be about having a long term horizon , because getting caught up in the short term noise can easily derail an investor from recognizing long term success. If we could achieve our financial goals by just keeping money in cash or buying CD’s with little to no risk, we would do that. However with inflation, taxes, and longevity risks, we must realize longer term higher returns to meet our goals and not run out of money later in life. In our newsletter, we have attached a guide from AMG Funds titled: “Keep Calm and Remain Diversified: A short and long term review of the power of diversification. As you review the slides, you see some really powerful examples of how market volatility is nothing new, and how over time Bear Markets do not last forever and are surrounded by much longer periods of Bull Markets. If you have any questions on any of the slides, your investments or anything else, we encourage you to reach to us and/or set an appointment to come in and speak with us.  

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Major Market Indices
Below is the Q4 '18 price return performance of some of the major indices:
"Investor's Manifesto"
In 2009 at the height of the market panic, Knight Kiplinger put out an interesting piece in Kiplinger magazine titled the "Investor's Manifesto".  It's an interesting set of guidelines for the average an investor to live by, and these are some of the principles by which we manage the wealth of our clients.

"Investor's Manifesto"
I am an investor.  I do not trade my assets frequently. That's speculation, not investing. 
I am also a saver,  fueling my investments with continuous savings from current income. 
I know that every kind of asset entails risk  -- even cash, which can be eroded by inflation. 
I know that higher returns entail higher risk,  in every kind of asset.  
I accept those risks , but I mitigate them by owning a diversity of assets. 
I regard my home as a place to live,  not as an investment. It is not a substitute for retirement savings. 
I have an investment plan  and a plan for asset allocation, in consultation with a financial adviser. 
I invest regular amounts every month,  in both rising and falling markets. I know I cannot gauge market tops and bottoms. If I received a windfall -- a bonus, bequest or gift -- I gradually feed it into my regular investment mix.  
I don't pour more money into hot markets  nor completely cash out of plunging markets. 
I spread my investments  among several asset classes, in a mix fitting my age and risk tolerance. 
*My share of bonds  roughly equals my age. I will allocate to stocks a declining portion of my financial assets as I get older. 
*This is one we disagree with as a "rule". Often this is not the case, as it depends on each client's specific circumstance. As an example, a number of clients may find themselves more financially secure (such as with large pensions, and decreasing expenses), and are then looking to pass their portfolio down to future generations.
I rebalance my portfolio every quarter.  If the stock market plunges, pushing my stock allocation way below its target percentage, I sell bonds and use my cash to buy stocks. 
I force myself to sell high and buy low  by periodic rebalancing - just what is temperamentally difficult for most investors to do. 
I know that stocks are risky in the short run,  so I hold in equities no money for which I have a likely need in the next three years. 
But stocks are not too risky in the long run.  They have outperformed all other commonly traded assets over periods of 15 years or longer. 
Foreign stocks account for a least 15%  of my stock allocation. I believe that developing economies will enjoy much higher growth than the U.S. in the decades ahead. 
I never borrow against my stocks.  Margin calls could force me to sell good assets at a bad time. 
I stick with my game plan.  I do not check the value of my investments every day or even every week.  
I try to keep my cool  when other folks are losing theirs. 
I remind myself often: I am an investor.   
On the Investment Horizon
Upcoming Key Dates on the Economic Calendar 

  • First Friday of each month: Unemployment report for the prior month, released at 8:30AM.

  • Wednesday, January 9: Federal Open Market Committee (FOMC) releases minutes of previous meeting at 2PM.
  • Monday, January 21: Martin Luther King Jr. Day - NYSE closed. 
  • Tuesday January 29 - Wednesday, January 30: The Federal Open Market Committee (FOMC) meets, and releases their announcement on Thursday at 2PM.
  • Wednesday, January 30 at 8:30AM: GDP, 4th quarter and annual 2018 (advance estimate).

  • Wednesday, February 6, Fed Chairman Jerome Powell speaks at 7PM.
  • Monday, February 18: Presidents Day - NYSE closed. 
  • Thursday, February 28 at 8:30AM: GDP, 4th quarter and annual 2018 (second estimate).

  • Tuesday, March 19 - Wednesday, March 20: The Federal Open Market Committee (FOMC) meets, and releases their announcement on Wednesday at 2PM.
  • Wednesday, March 20 at 2:30PM: Fed Chair Jerome Powell to hold his quarterly press conference to explain the FOMC's latest quarterly economic projections.
  • Thursday, March 28 at 8:30AM: GDP, 4th quarter and annual 2018 (third estimate); Corporate Profits, 4th quarter and annual 2018.

If you desire an appointment, have any questions on any of this material, or any other financial subjects may relate to your own financial circumstance, please reach out to us at the contact information below:
Brian Cohen, CCO; email: ; phone: 631-923-2487
Chris Congema, CFP®;  email: ; phone: 631-923-2486
Joe Favorito, CFP®; email: ; phone: 631-930-5336

Direct office email:  
Direct phone: 631-923-2485

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 Landmark Wealth Management, LLC
900 Walt Whitman Road, Suite 208
Melville, NY 11747
 (631) 923-2485