May Market Update

Market Update May 31, 2018: Expect A Barbell Year

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Eric W. Hilliard

CERTIFIED FINANCIAL PLANNER ™

Branch Manager

2018 Market year-to-date Summary:

For over a year, beginning November 2016, markets and investors enjoyed upward price momentum, exceptionally low volatility and consecutive record highs. After making a closing high on the S&P 500 of 2782 January 26^th, the domestic stock market began a period of correction and higher volatility in early February that took it down to a closing low of 2581, down 7.2% (intra-day, the correction was closer to 12%). Markets recovered somewhat and then revisited near those lows in March and again in April, making a “W” shaped pattern that is very typical of a market trying to rebound from a correction. By mid-April, the market recovered to back near where it began the year at 2695. Since then, volatility has decreased and the S&P 500 has largely traded within about a 100 point range.

Since, on average, the broad market S&P 500 Index has experienced a pullback of 15% each year since 1980, this correction played out very much as we might have expected.

Below are the asset-allocated Dow Jones Target Risk Index returns year-to-date as well as the returns for select widely followed individual equity and fixed income indices.

Returns as of 5/31/18___________________________________________________________________

Morningstar Target Risk Indexesmonth to date YTD Past 12 months

Dow Jones Aggressive Index 1.33% 1.62% 14.05%

Dow Jones Moderate Aggressive Index 1.08% 1.23% 11.34%

Dow Jones Moderate Index 0.80% 0.73% 8.53%

Dow Jones Moderately Conservative Index 0.49% 0.11% 5.40%

Dow Jones Conservative Index 0.27% 0.12% 2.86%

U.S. Equity Indexes

S&P 500 TR 2.41% 2.02% 14.38%

RUSSELL 2000 6.07% 6.90% 20.76%

International Equity Indexes

MSCI EAFE DEVELOPED MARKETS -2.25% -1.55% 7.97%

MSCI EMERGING MARKETS -3.54% -2.61% 14.03%

Fixed Income Indexes

BLOOMBERG BARCLAYS US AGGREGATE BOND 0.71% -1.50% -0.37%

BLOOMBERG BARCLAYS US CORPORATE HIGH YIELD BOND -0.03% -0.25% 2.33%

Returns provided by Morningstar as of 5/31/18.

The Good News is…

Corporate earnings reported for Q1-2018 were stellar. In fact, As Federated Investor’s Chief Equity Strategist, Phil Orlando told me last week at our National Raymond James Financial Conference in Washington, D.C. the last four quarters delivered the strongest combined earnings growth experienced since 2011. Additionally, companies are beginning to benefit from the Tax Cuts and Jobs Act, passed in December. Economic indicators point to solid economic growth throughout the rest of 2018, which should support markets.

Why a barbell?

Orlando noted that this year is somewhat unique in that it is only the sixth time in history three things have taken place at the same time: a new Fed President, the 2^nd year of the Presidential Cycle (with mid-term elections occurring towards the end of the year) and being in the period of the year some refer to as “Sell in May and go away”. A few words about each of these:

A new Fed President: Jerome Powell was sworn in as Fed President February 5, 2018. According to Orlando, every instance a new Fed President has been sworn in the market has experienced a correction within the next six months and recovered by the end of the year to make solid gains. This time seems to have followed that trend with the correction occurring pretty soon after Powell began his term.

Year two of the Presidential Cycle: According to Orlando, Looking at Presidential cycles over the past 70 years, quarters two and three (April – September) during the second year of a presidency have been slightly negative, but each of those years, the fourth quarter was very strong, with gains for the full year overall. Further, the single best month in the presidential cycle is October of year two, when the market seems to begin anticipating how mid-cycle elections will go.

Sell in May and go away: While the market performance in during the summer months tends to be more muted, many years do continue to deliver neutral to positive returns. In fact, Stephen Auth, Chief Investment Officer from Federated wrote in a May 25, 2018 Market Memo that over the past 30 years, if you remove 5 particularly bad May-September periods, three of which were during recessions and another was during the Greek Debt Crisis, the average return during that 6 month period has been 2%.

Jeff Saut, Chief Equity Strategist at Raymond James has continuously said in recent weeks that he believes the markets are poised to make new highs. The question to us is the timing. Will it occur during the summer months or early fall, closer to the elections? We would not be surprised to see new highs early summer, another pullback around August/September, followed by a strong period October though the end of the year.

Either way, odds seem in favor of the S&P 500 delivering fresh new highs during 2018.

Bottom line

We do expect some continued volatility from back and forth news about trade tariff negotiations, North Korea/U.S. talks, Italy perhaps considering an exit from the Euro and other potential geo-political events. There is always a wall of worry for markets to climb.
Inflation and interest rates remain low from a historical standpoint but are moving higher, causing additional bouts of volatility.

Given the strong economic and earnings backdrop, pullbacks should be normal in nature and viewed opportunistically.

In the meantime, a well-diversified portfolio geared toward achieving your long-term goals should allow you to participate in upside potential as well as serve as a ballast for any short-term volatility that may arise in the coming months.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur.

DJ GLB Aggressive Index - The DJ GLB Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Aggressive index is 100% of All Stock Portfolio Risk.

DJ GLB Conservative Index - The DJ GLB Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Conservative index is 20% of All Stock Portfolio Risk.

DJ GLB Moderate Aggressive Index - The DJ GLB Moderate Aggressive is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Aggressive index is 80% of All Stock Portfolio Risk.

DJ GLB Moderate Conservative Index - The DJ GLB Moderate Conservative is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate Conservative index is 40% of All Stock Portfolio Risk.

DJ GLB Moderate Index - The DJ GLB Moderate is a total-portfolio index that allow investors to evaluate the returns on their portfolios considering the amount of risk they have taken. These profiles are defined based on incremental levels of potential risk relative to the risk of an all-stock index. It's made up of composite indices representing the three major asset classes: stocks, bonds and cash. The asset class indices are weighted differently within each relative risk index to achieve the targeted risk level. The weightings are rebalanced monthly to maintain these levels. The DJ GLB Moderate index is 60% of All Stock Portfolio Risk.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy and banks. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance which include both U.S. and non-U.S. corporations. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. Some of the material prepared by Raymond James for use by its advisors. Any opinions are those of Eric Hilliard and not necessarily those of RJFS or Raymond James.

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