Market Update

When the market bottomed on Christmas Eve we had: Mnuchin working with the banks to calm markets, Powell capitulating on more rate increases that the Fed suggested were coming just a couple weeks earlier, China and other central banks started to add liquidity to their markets, and President Trump tweeting the market is a good buy. We then had a strong New Year’s rally which has since neared technical resistance, making up most of the losses experienced by the US indices during the 4th Quarter of 2018. The rally had good initial buying thrust, but recently, volume and momentum seem to have weakened. With short positions being covered, buyers are becoming harder to find. The result is that the markets are now appearing to be overbought, short-term, and likely will push lower, based on current market conditions and today’s economic environment.

Recent Federal Reserve action to take a "pause" on raising rates because of the "economy and financial conditions", has encouraged the markets higher (i.e. the Fed is being more accommodative). The Fed’s recent stance seems more cautious and raises concerns in regards not only to the economic picture, but also what the effects will be in the current interest rate cycle, stock market, and currency markets. The concern going forward is if the economy continues to struggle at the end of an economic cycle while central banks are easing to support financial asset prices, the impact could be a period of stagflation.

The word recession is also buzzing again, while some leading indicators continue to show weakness. Yet, we don’t have confirmation of a US recession, only a slowdown with seemingly decreasing forward earnings and concerns in the global economy. Headwinds to the economy continue to be:

• The trade dispute with China (and other trading partners) persisting past March
• Brexit could continue without resolution
• Other European issues related to the ECB or political pressures (e.g. France, Italy, Spain)
• The Middle East could have sparks in regards to Syria, Turkey, Iran, and the oil markets
• Recent US pressure on Venezuela with Maduro and potential risks
• US political landscape that will not cease to surprise us

While our current market view is to cautiously manage downside risks to determine how the market reacts to the recent rally, the following could signal a stabilizing market:

• A lasting trade agreement with China
• A surprisingly smooth Brexit
• Fed becoming even more dovish
• Signs of economic improvement
• A more congenial atmosphere in Washington D.C.

Raymond James Investment Committee has released its corporate outlook, click link for visual infographic on 2019: https://www.raymondjames.com/pointofview/2019-outlook-what-lies-ahead-infographic

Mustard Seed Advisors remains more cautious than the Committee, in the sense that we expect more volatility for a longer period of time. In our view, it may be mid-to-late year before we see stability and growth in stocks. A key allocation difference is that we are not quite as bullish on international stocks, particularly developed/European stocks and remain cautious on US market exposure. As a result, we will not hold as high a percentage weighting in non-US stocks in the short-term, particularly for our retired clients and in accounts where we are drawing income/distributing regularly.

What are we telling our clients about our 2019 outlook?

• After 5 years of minimal volatility, normal volatility returns
• We do not expect 2019 to be a significant growth year for stocks: low returns or loss in stock prices are all possibilities for 2019
• Stock price stability and growth is not likely sustainable until there is further resolution to trade policy and other previously mentioned economic concerns.
• It could be the latter part of the year before headwinds subside, and stocks sustain flat-to-upward movement again.
• We are not yet expecting or calling for a recession in the US in 2019 even though growth has slowed. However, we are cautious and want our clients to be aware of the possibility that a recession could occur in 2019 or 2020, depending on how the economy digest aforementioned concerns.

What should our clients do?

• You should ensure you have enough cash and liquid investments on the sidelines this year (more important during periods of higher volatility than during bull markets)
• Inventory what you have in cash (we can help) and compare that amount to your known expenses for 2019. Known expenses should be covered by cash reserves and reliable income that will occur in 2019
• Plan a cushion for unexpected expenses. Take a more defensive approach than you might have in 2016 or 2017; use low volatility investments (cash/money market/short-term CDs, ultra-short term bonds) in this climate to reduce the need to sell investments when prices are low and better manage timing risk during a bad market; this discipline is particularly important for clients who are retired and living on their portfolio distributions
• For clients who have long time horizons and have cash to invest, there will be buying opportunities to look for, with which we can help; in 2019, we will be recommending a dollar-cost-averaging approach (invest over several months) as opposed to buying all at once, given our outlook
• Connect and communicate with us about any changes in your lives that you believe may warrant a strategy change
• Last but not least – do not check your balances every day! Create moments to unplug from market news. Volatility can and will cause anxiety if you are tracking it that closely. Leave that to us. Keep a long-term mindset. We believe Patience is the key to successful investing.

Never hesitate to reach out to our team. We are here to serve you!

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 the Mustard Seed Advisors team 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels. CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. There is generally an inverse relationship between interest rate movements and bond prices.