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2018 Year in Review—Disconnect or Breakdown?

Just like most of our clients, those of us in this industry are very happy to put 2018 behind us, and to look for a more coherent direction for global markets in 2019. We will start by saying that for many analysts and economists, it seems that the stock market has become disconnected from the economic fundamentals that typically provide it with direction. Coupled with the increased volatility (swings of 500 points and more have become commonplace in recent weeks and months) and the overhang of dysfunction in DC, pessimism about the prospects for the stock and bond markets have risen to the highest levels in recent years. What many of our clients are asking us right now is whether or not we think this pessimism is warranted, or whether we think that a return to “normalcy” is around the corner. Our answer to that is “both”—there are negative factors influencing markets, but we think (as a firm and as an industry) that those have largely been built into stock and bond prices at this level. We may even find, after looking back at this time, that the market has again overacted and overshot on the downside.

There is no denying that the recent sell off has been fast paced and hard to watch. It is in times like these that it is important for investors to step back, turn off the TV and look at the data. This is what we do know: the US economy is on track to record its best annual growth in over ten years and by some measures, the best in decades. Unemployment is sitting near 50 year lows and is expected to go lower. Corporate earnings (which is the one best data point to predict the future direction of the market) are sitting at all-time highs and expected to go higher. In 2018 US corporations will have paid more dividends to shareholders than ever before in history. Interest rates are still low by historical standards and inflation is in check and at the Fed’s target level. The US consumer, who amounts to about 70% of GDP, is healthy (as witnessed by the fact that this holiday season was the best retail shopping season on record).

So with all of these good things happening why is the market so unsettled? In a word... uncertainty. The market likes good news, can handle bad news, but hates uncertainty. And there is no lack of uncertainty these days. The first thing that comes to mind for most folks is the dysfunction in Washington, but at the same time we also recognize that there are quite a few countries around the world dealing with their own issues, adding to the general feeling of global instability. Whether it is Theresa May trying to navigate the UK’s exit from the EU, the backlash against France’s President Macron or even Germany’s Chancellor Angela Merkel trying to handle the touchy issue of immigration, many Western countries are themselves in periods of governmental disarray. This is not positive, but we believe that a great deal of that has already been priced into stock markets around the world. As Raymond James’ political analyst Ed Mills recently wrote, when it comes to politics, “things are rarely as good as hoped nor as bad as feared.” We think that global markets are tilted currently to assume the most negative outcomes, and that any positive resolution of issues like Brexit, trade, etc., could be a catalyst for markets to recover ground.

As most experts would agree, growth is showing signs of slowing down around the globe, while closer to home there is much talk about an upcoming recession here in the US. So let’s just get this out of the way....yes, the US economy will have a recession at some point in the future. We think that the likelihood of a recession in the coming year is unlikely, somewhere in the range of 10% to 15% probability, but certainly over the next several years that would be a normal and expected part of the economic cycle. Economies expand and they contract, and those contractions are called recessions--but also keep in mind that recessions are very seldom anything like the historic recession of 2008, the likes of which we typically see only once in an investor’s lifetime. They can also be brief and relatively mild.

In terms of hard numbers, the S&P 500 will have ended the year down around 6% for the year and around 15% from its early October high. Other parts of the US market like small company stocks (small caps) are having a bit of a tougher year, down around 12% for the year and over 20% from their recent highs. After having a very good year in 2017, international stocks were also down mid-double digits for the year. During 2018 the Federal Reserve Bank continued on their path of raising interest rates which created a headwind for bonds. As a result, bond performance measured by total return (income plus or minus price movement) was mostly negative for the calendar year. And even though no one is talking about it anymore, Bitcoin was down over 70% in 2018—probably the most warranted of all of the declines, but thankfully not an issue for our clients, as we tend to steer away from very risky or speculative bets.

While those are tough numbers to digest, they are by no means unusual. To put things into perspective, the average intra-year pullback (high point to low point) has been 14% since 1980. On the bullish side, the most recent data from the AAII (American Association of Individual Investors) shows their bullish indicator is sitting in line with the lowest level we have seen in over five years. Where it is obviously hard to say where we go from here, this indicator has been extremely consistent in forecasting market bottoms (i.e. investors are least bullish at market bottoms and most bullish at market tops—smaller investors tend to “buy high” and “sell low”).   So bottom line—not a good year, not a fun year to be an investor, but nothing that we have not all seen before and will no doubt see again. On average markets are down two to three years out of every ten, and as investors, one takes the good with the bad, knowing that the long term market returns are always positive. As our mentor Bob Hays used to say, “I don’t know whether the next 10% or 20% move in the market will be up or down, but I know what the next 100% move will be, and it isn’t down.”  

Closer to home, we had a year full of changes at Nichols Geegan King. We now have offices at both Bayshore Blvd. in Tampa and at Raymond James’ international headquarters in St. Petersburg, which makes life a little bit easier for our clients on both sides of the bay, and makes parking a lot easier for everyone. We brought on board a new team member, Cynthia Kula, who was formerly our operations manager in the Tampa branch before moving to our headquarters to become a Client Reporting Analyst. Cynthia has all of her securities licenses, and has spent more than 35 years in the industry. We are fortunate to have her. We are also excited to announce that our team has begun an association with advisor Danyell Jones, who works primarily out of the downtown Raymond James office, but also meets with our clients at the Bayshore branch in Tampa as well as here in St. Petersburg.  Danyell comes to us from a career at Bank of America, and is especially well versed in Raymond James’ technology tools, as well as bringing other significant competencies to the table, and we look forward to introducing her to our clients this coming year. Our youngest associate, Andrew Hays, has now completed the first part of his Series 7 license, and will be taking the second exam soon. Good luck, Andrew!

In other news, our team continued to rank among Raymond James’s top teams in the nation throughout 2018, and in addition to achieving our normal awards and recognitions, Greg was named as one of Florida’s Top Wealth Advisors, by Shook research in conjunction with and published in Forbes. In addition, Greg was asked to be interviewed by The Wall Street Journal’s Content Studio to provide insight on a behavioral finance piece that Raymond James published and made available on WSJ.com. Janet was also asked to speak in front of both advisors and at a national management conference, to share our team’s philosophy and approach with other parts of the firm. On a more personal note, T.J. brought in his 50th birthday by running his first 100-mile race, and Laurie’s daughter Alyssa started her college career at the University of South Florida. Go Bulls!

In closing, we appreciate each and every one of you, your enthusiasm in good markets and your patience in bad. We are with you every step of this journey, and will be for years to come, and from all of us at Nichols Geegan King Family Wealth Advisors, we wish the best for you and your families in 2019.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nichols Geegan King Family Wealth Advisors and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investments mentioned may not be suitable for all investors.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research is based on an algorithm of qualitative criteria and quantitative data. Those advisors that are considered have a minimum of 7 years of experience, and the algorithm weighs factors like revenue trends, AUM, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of 21,138 advisors nominated by their firms, 2,213 received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC.