February 2019

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Kevin: Greetings. John Finley, Kevin Coyle, February 6th market update. So we had a nice fun Christmas present Christmas Eve and since then there's been a bit of a change. John, a little bit of comment of fourth quarter and year-to-date market?

John: Christmas Eve was the low point of the stock market since the all time high back on September 20th. We're down almost 20%. Since that time till now, we've recovered about 60% of that value back, and now it's more of the small cap stocks that are leading the way.

Kevin: So you have more of a risk on. So it seems like the appetite for risk, high yield, small cap, emerging markets. The earnings backdrop, the economy?

John: Economy's strong. We have still very strong employment situation. Hourly earnings are up over 3%. That's good for consumer spending. Maybe not so good for earnings for companies because now their margins are going to be squeezed a little bit. But we still have very low inflation, which is good. And then we also have the Federal Reserve kind of backing off, a little more dovish now.

Kevin: The initial reaction to the Fed's raising rates seemed to be getting the market's attention in terms of declines. So now we kind have seen posturing that middle zone in terms of not too hot, not too cold in terms of backing off and earnings seem to be at least ... Earnings report so far and this month seemed to be positive as well..

John: And just to set the expectations, last year had tremendous over 20% earnings growth. This year is going to be much more normalized. It's going to be in the single digits. That's not necessarily a bad thing. Studies have shown that when earnings come down from a high like that, the stock market actually tends to do pretty well.

Kevin: Kind of like when the markets like a divided House and Senate, perhaps, maybe. Not too hot, not too cold. So you think about earnings, you think about where the markets were at when the market declined. A lot of comments that the valuations were relatively more attractive in terms of entry points in terms of risk management. But all things, you come back to the beginning which is the most important element, which is structure. So expectations as we go through this year and the importance of structure.

John: Well, you look at the stock market over the very long term, even back to 1926, the return has been just under 7% nominal. The markets kind of ebb and flow, but that the channel has been pretty consistent. However, most of the returns, or at least two-thirds of the returns for most of that period, came from dividends. That's not true anymore. Now we would expect more of the return to come from capital gains than dividends.


Kevin: So the importance of structure and having appropriate levels of risk and/or growth in your portfolio and being able to make sure you're comfortable with your volatility exposure, i.e., exposure to fluctuations when they happen, which they will.

John: And you want an allocation to bonds to help be a ballast against that kind of volatility.

Kevin: And, hopefully, warmer weather. We've gotten through the February period in Chicago. We're looking forward to spring around the corner. Days are getting longer. Until next time, enjoy.