Market Commentary & Investment Perspective January 2019
Market Update
(all values as of 02.29.2024)

Stock Indices:

Dow Jones 38,996
S&P 500 5,096
Nasdaq 16,091

Bond Sector Yields:

2 Yr Treasury 4.64%
10 Yr Treasury 4.25%
10 Yr Municipal 2.53%
High Yield 7.63%

YTD Market Returns:

Dow Jones 3.47%
S&P 500 6.84%
Nasdaq 7.20%
MSCI-Europe 1.23%
MSCI-Pacific 3.98%
MSCI-Emg Mkt -0.27%
US Agg Bond -1.68%
US Corp Bond -1.67%
US Gov’t Bond -1.59%

Commodity Prices:

Gold 2,051
Silver 22.87
Oil (WTI) 78.25


Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 150.63
Canadian /Dollar 0.73

Macro Overview

Even during the turbulent year of 2018, the U.S. economy continues its resilience into 2019, with unemployment at its lowest level in 49 years, wage growth reaching levels not seen since 2009 and consumer spending and industrial production remaining strong. A tight labor market along with moderate inflation has maintained an accommodating environment for consumers.

The year-end climate heading into 2019 became more challenging as equity markets reacted negatively to another rate hike in December along with two more expected hikes in 2019. Market sentiment seemed to change from the view of Fed hikes as validation that U.S. economic activity is healthy enough to endure them, to concern over slowing corporate earnings combined with balance sheet reductions could lead to a recession.

Weariness among investors escalated towards the end of 2018 with uncertainty also surrounding trade, a government shutdown, and global economic growth.

Global equity markets ended 2018 in negative territory with nearly every major index in both developed and emerging markets falling. China’s stock market was among the worst performer internationally as trade tensions took a toll on Chinese manufacturers and exporters. U.S. stock markets experienced volatility that had not occurred in several years resulting in a pullback for all major domestic equity indices in 2018.

Ongoing trade disputes and the imposition of new tariffs negatively influenced the markets and economic projections throughout the year. Relations with China were forefront as the administration negotiated trade terms intended to better protect U.S. intellectual property and disparate tariffs.

Growing U.S. oil production and an increase in supplies led to a drop of U.S. oil prices by 25% in 2018. The benchmark for U.S. oil, West Texas Intermediate (WTI), fell from $60 per barrel in the beginning of the year to $45 per barrel by year-end, simultaneously reducing the price of gasoline nationwide and freeing up cash for consumers.

According to the Federal Reserve Bank of New York, the likelihood of a recession remains relatively low with less than a 15% probability one will occur in the next year. The Fed has historically seen greater than 30% probabilities before each of the last seven recessions since 1970.

(Sources: Federal Reserve Bank of New York, Treasury, Labor Dept., Bloomberg)



The Fed raised rates four times in 2018

Global Equity Markets Decline In 2018 – Equity Review

Volatility throughout the trading year kept stock valuations tough to determine. A popular process that analysts use to value stocks is based on Price Earnings (PE) ratios, calculated by dividing the current market price of a stock by its earnings per share. PE ratios for stocks began the year above 20 for all three major equity indices and finished the year near 15. The lower the PE the less expensive stocks are relative to their earnings so a drop in PEs has made stocks more appealing to value seeking investors.

Global equity markets experienced widespread negative returns for 2018 with both developed and emerging market indices falling. Domestic equities faired better than international stocks for the year as earnings optimism and a strong dollar helped stabilized U.S. markets.

An increase in the use of options as a hedge against market volatility increased to roughly 20 million option contracts a day being traded, surpassing previous records according to data compiled by Options Clearing Corporation. Creative option strategies have evolved as increased stock volume accompanied by consistent volatility has become the norm. Computer as well as human initiated trades have also leant to staggering trading days resulting in wild market swings as traders cover open option contracts. (Sources: Options Clearing Corp., Bloomberg, Federal Reserve;

Short Term Bond Rates Rise – Fixed Income Review

Shorter term bond yields rose closer to longer term bond yields, thus further flattening the Treasury bond yield curve, an economic gauge closely followed by market analysts. The benchmark 10-year Treasury Bond ended the year at 2.69%, down from a mid-year high of 3.24% it reached in November.

The Fed indicated that it would continue to shrink its balance sheet by $50 billion a month, a reversal from balance sheet expansion following the 2008-2009 financial crisis. What this means is that rather than buying government bonds in the marketplace and placing them on the Fed balance sheet, the Fed will instead forego holding additional bonds and allow bonds to mature without replacing them. This is a form of quantitative tightening as is raising short-term rates. 

The Fed raised rates four times in 2018 and has risen rates nine times since it began tightening rates from near-zero three years ago. The Fed signaled that it expects to raise rates at least twice in 2019. Some analysts believe that the Fed has raised rates in order to be able to lower them as a form of stimulus should economic conditions deteriorate. (Sources: Treasury Dept., Federal Reserve)

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Tax Rule Changes For 2019 – Tax Planning

Various changes are effective for the 2019 tax year beginning January 1, 2019. The changes affect most every tax payer both as an employee and self employed business owners. Indexing will affect 2019 Tax Brackets & Rates, which is essentially an inflation adjusted modification to account for rising inflation trends. For 2019, income brackets increased by roughly 2% across all income levels.

With personal exemptions eliminated under the new tax law, a larger single standard deduction was devised in order to streamline returns for taxpayers. Standard deduction amounts increased slightly for 2019.

Other changes for 2019 include: Estate Tax Exemption increases from $11.18 million to $11.40 million in 2019; Elimination of the ACA penalty for not having health insurance becomes effective; Unreimbursed medical expenses must exceed 10% of AGI in order to deduct; Alimony is no longer deductible for the payor and no longer taxable for the recipient for divorce decrees issued after December 31, 2018. (Sources:,








Three Big Things


The market rose with record corporate earnings in the first three quarters of 2018, but in the end, did not reflect the underlying growth.  While some over-reactions brought about by tax reform subside, growth is normalizing.  While earnings are growing at a slower rate, they do continue to grow.


After nearly a decade-long bull market supported by near-zero interest costs, the Fed began raising rates incrementally.  A reduction in monetary accommodation by the Fed should eventually lead to a normalization of volatility.  Unfortunately, the long-overdue market correction in the last quarter of 2018 seems to have been interpreted by investors as fear of the Fed “over-shooting” their goal – removing too much liquidity.  Recessions will certainly occur, as is the normal course of the economy.  Market corrections will occur, as is the normal course of the market.  They are, however distinctly different.  When human emotion is removed from the equation, the economy provides the fundamental strength to the market.  The US economy remains strong at this time, with continued job growth and wage growth for the first time in nine years.


The most prominent human emotion affecting the market today is uncertainty caused by headline events and geopolitics.  Uncertainty affects both household and corporate financial decisions.  When certainty is restored, with the resolution of trade talks, for example, investor confidence will return.  I believe this will be the case regardless of the exact terms of that resolution or whom it favors.

Looking Forward

To date in January 2019, the market has recovered approximately half of the ground lost in 2018.  Few alternative funds have performed as advertised, and KCG is re-evaluating their use, in general, versus individual bonds, bond funds, or real estate.  We take a long-term view and remain committed to disciplined diversification, making optimal use of stocks, bonds, indexes, and skillfully managed funds.