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4TH QUARTER EQUITIES

Equity Market:  Stocks soared in January, fell back in February and March, recovered well in the second and third quarters, and reached record levels in September. Then anxiety struck in the fourth quarter over rising interest rates and “trade wars” and the potential effect on corporate earnings. It ended being the worse year since 2008. Equity Market:  Stocks soared in January, fell back in February and March, recovered well in the second and third quarters, and reached record levels in September. Then anxiety struck in the fourth quarter over rising interest rates and “trade wars” and the potential effect on corporate earnings. It ended being the worse year since 2008.  The Dow Jones Industrial Average was down 12.48% for the fourth quarter and 7.22% for the year. The S&P 500 was down 13.97% for the quarter and 6.24% for the year. Technology stocks were especially slammed. The Nasdaq Composite lost 17.54% for the quarter and 3.88% for the year. Similarly hard hit were the small cap stocks with  the Russell 2000 index down 20.51%  for the quarter and  12.18 % for the year.

On the positive side, the recent market correction has made equity valuations look more reasonable. The forward 12-month P/E ratio for the S&P 500 is now 14.2 versus the 5-year average of 16.4 and the 10-year average of 14.6.  On the negative side, corporate earnings growth for full-year 2019 is expected to be below 10% versus 20.3% for full-year 2018. On the positive side, the recent market correction has made equity valuations look more reasonable. The forward 12-month P/E ratio for the S&P 500 is now 14.2 versus the 5-year average of 16.4 and the 10-year average of 14.6.  On the negative side, corporate earnings growth for full-year 2019 is expected to be below 10% versus 20.3% for full-year 2018. Thus, on balance, we think the market will show modest single digit gains in 2019.  But we expect turbulence as the news on Federal Reserve actions and the trade talks unfold.The market will be buoyed if the Fed keeps rates lower and the Trump Administration somehow reaches a trade agreement with China.   Conversely, higher rates and failure in the trade talks could sink the market lower.  We do not anticipate peaceful sleep in the months ahead. 
OUR STRATEGIES  Asset Allocation: Normally, for clients investing new money,  we  recommend 60% allocation to equities and the remaining portion to cash, bonds with maturities under two years, and alternative investments.  But in this environment, we may recommend a lower allocation to equities until the market direction is somewhat clearer. Preferred Equities: We remain focused on large cap companies with strong balance sheets, sustainable cash flows, and credible business models. Companies that pay attractive dividends are central to our strategy.  Some of the sectors getting our attention: 

TECHNOLOGY: We are cautious about this sector – especially given the declines in the big tech names  – but areas such as bio technology and semi- conductors have our interest. 

FINANCIALS: Our focus is upon regional banks. Prices are reasonable for many of these bank stocks.

CONSUMER STAPLES: We are looking at companies in this sector because it has value stocks with good future potential. 

ENERGY: This sector has been battered – but the potential for upside movement is good.


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