Quarter 3 2018 Market Update

We hope you enjoyed your summer as our family did. We so enjoy having Everett out of school, the slightly more laid-back schedule and trips to the beach. That time always goes by too quickly. We also hope this finds you doing well and that you fared well through Hurricane Florence.

As we enter the last few months of the year, a year that seemed to fly by as they all do these days, we wanted to review the past quarter in markets and convey what we expect going forward.

During the first quarter of this year we experienced the first correction since the Presidential elected in November 2016. Since that time, two primary issues have influenced markets: 1) Unsettled trade disputes that have at times roiled markets and 2) strong earnings that have supported markets through the uncertainty.

Our May report was titled “Expect a Barbell Year”, referring to a set-up that looked like most of this year’s gains may occur in the second half of the year. So far this has played out pretty well, as the third quarter delivered positive returns for the Dow Jones Target Risk Indexes as well as all the broad equity indices. In fact, both the S&P 500 and the Dow Jones Industrial Average made new all-time highs in recent weeks.

Before we continue our discussion about the quarter just experienced and what we expect going forward, below are the asset-allocated Dow Jones Target Risk Index returns as well as the returns for select widely followed individual equity and fixed income indices.

Returns as of 9/30/18

Returns provided by Morningstar as of 9/30/18.

Highlights from Q3-2018 (July-September)

Trade disputes

Much of the news impacting markets during the second quarter related to trade disputes and concerns over whether they would escalate into a full-out trade war. The United States has now concluded successful negotiations with Mexico and Canada, two of our largest trading partners, and markets have consistently responded positively to any news that indicated negotiations were proceeding well.

The trade dispute with China is yet unresolved and according to a very informative piece titled “China Appears to Be Losing the Trade War” written October 2, 2018 by Michael Jones, CFA President & CEO for RIverFront Investment Group, it may extend for many years. Jones just returned from an extended due diligence trip to Asia and said the trade dispute with the Trump administration has exposed the risks of having all production in one country, so companies are seeking to diversify their product manufacturing away from complete dependence upon China. This will likely benefit other Asian countries and possibly some eastern European ones. Based on his contacts in China, the expected retaliation from the Chines government will be to sell some portion of their U.S. government bond holdings. Jones does not believe that an extended trade dispute with China will have much impact on the U.S. economy though because with a nearly $400 billion trade deficit, China is a negative contributor to U.S. final demand.

In agreement with Jones is the results of a Goldman Sachs study we read about in the September 28, 2018 “Weekly Update: Rarely do politics matter for the markets”, written by Linda Duessel Senior Equity Strategist with Federated. The study reviewed 150 years of trade tensions and concluded that higher tariffs only modestly impact growth and prices. We will continue to monitor this situation.

The U.S. economy

The U.S. economy continues to grow at moderately strong levels, according to Raymond James Chief Economist Scott Brown. Inflation is moderate and the job market is strong.

The Federal Reserve and interest rates

As was expected, The Federal Open Market Committee raised short term interest rates on September 26^th from 2% to 2.25%. It is widely expected they will raise rates again in December.

The Federal Reserve raised their GDP growth forecast for 2019 and 2020.

Sector classification change impacting technology companies

Effective Monday, September 24^th a new Communication Services Sector replaced the prior Telecom sector inside the S&P 500 and MSCI indices. According to a September 21, 2018 Business Insider article “The biggest tech companies are about to undergo a major reshuffling on the stock market – here’s what’s coming, and why it matters” this is only the second sector addition since 1999 and is an indication of how the telecom, media and internet industries have become more similar.

The Communication Services Sector includes companies in the Consumer Discretionary Sector that were formerly classified in the Media and Internet and Direct Marketing Retail sub-industries and also a few companies that were in the Information Technology Sector. Impacted are some large and well-known companies, including Facebook, Alphabet and Netflix.

It is important to be aware of this because previously many investors sought out technology mutual funds or ETFs to invest in these popular companies. These companies will no longer be included in technology investments. Many ETFs are being modified, some with name changes, to incorporate the stocks inside the new Communication Services Sector. This sector will be the largest sector in the S&P 500 and have roughly a 10% weighting

Expectations for Q4-2018 (October-December)

As stated in our previous market letter, historically, the fourth quarter is the strongest of the year, especially so during mid-term election years, and especially as the uncertainty of the elections is removed. Additionally, the strong economy has continued to translate into very good earnings growth and this is largely expected to continue into the fourth quarter.

The market is always a balance of opportunity and risks, however in the short-term balance seems to be tipped, at least slightly, in favor of opportunity.

Should anything change we will keep you updated on anything that could affect your long-term financial plan. In the meantime, please remember to keep up with recent updates on social media:

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Please contact us if anything changes regarding your situation that would necessitate our reviewing your plan. Thank you for your trust in me and in our firm.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion 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. Material prepared by Raymond James for use by its advisors. Any Opinions are those of Eric Hilliard and are not necessarily those of RJFS or Raymond James.

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