Third Quarter 2018 Review

Third Quarter 2018 Review

Market Overview

We continue to see back and forth trade posturing between the United States and foreign trading partners and expect this to continue throughout the remainder of 2018. With that being said, the U.S. and Canada reached a deal after a lengthy negotiation. The new “United States-Mexico-Canada Agreement” (USMCA) is a reworking of NAFTA and hopes to bring more jobs into the U.S. Despite this trade uncertainty in quarter 3, the American economy advanced. In the 3rd quarter of 2018, U.S. stocks once again performed well seeing momentum from U.S. growth and strong earnings reports. The trade concerns and other political uncertainty has continued to put pressure on international markets. Emerging market stocks slid slightly while Europe continues to struggle as the United Kingdom’s negotiations to “Brexit” from the European Union leads to continued uncertainty for the region. Fixed income markets remain a challenging place to invest as interest rates continue to rise.

Equity Markets

Large U.S. companies continued their outperformance as the S&P 500 returned 7.2% for the 3rd quarter. The Dow Jones Industrial Average rose by 9%. Despite these returns, volatility declined resulting in a quarter where the S&P 500 did not have a single trading day where it closed with a 1% move up or down. Small cap stocks trailed larger companies but still posted a 3.2% return for the quarter. International stocks in developed markets declined (0.8%) for the quarter, lagging the United States. As discussed above, emerging markets also retreated with a negative (2%) return for the quarter. Foreign trade will likely remain a focus of the Trump administration into 2019 with further volatility in international markets also likely to continue.

Bond and Credit Markets

On September 26th, for the third time this year, policy makers voted to unanimously raise the federal funds rate 25 basis points to a range of 2.00% to 2.25%. It is expected that the Fed will look to raise rates once more before the end of 2018. While the President negatively reacts to these rate hikes, they are still considered historically low and a sign of a strong economy. Fed Chairman Jerome Powell stated that “this gradual return to normal is helping to sustain this strong economy for the longer run benefit of all Americans.” Most researchers believe that even with continued rate hikes, they are not expected to slow down a resilient economy. From an investment standpoint, these rate hikes pose challenges to bondholders as bond prices decline when interest rates rise. The broad based U.S. Aggregate Bond Index declined slightly by (0.2%). For the year the index is off by (1.6%). Municipal bonds rose 0.3% for the quarter. The yield curve remains very flat with a 38 basis point spread between the 2-year and 30-year U.S. Treasury bond.

Commodities

Commodities declined for the quarter posting the longest losing streak in more than 3 years. The Bloomberg Commodity Index fell (2.5%) amid concerns over the Chinese demand outlook and continued trade friction. Gold posted its 6th straight decline in September while oil and natural gas prices continue to climb. The U.S. Dollar is a significant factor when it comes to commodity prices. The Dollar Index moved higher by 0.41% for the quarter and is now higher by 3.17% for the year.

Perspective For the Rest of the Year

The overwhelming media story for the 4th quarter is likely to be centered on the mid-term elections occurring in November. Democrats are forecast to make gains in the House while Republicans may fare better in Senate races. If Democrats are able to take control of Congress they could look to block President Trump’s policies essentially making him a lame duck president for the remainder of his term. Continued trade tension and this political uncertainty could cause the abnormally low volatility from the 3rd quarter to subside and investors should expect market fluctuation to normalize.

Year-End Tax Planning

At CRA Financial, we look to help our client’s create tax efficiencies where possible. This is done by looking at which mutual funds will be paying out capital gains distributions at the end of the year and also harvesting losses in non-qualified portfolios where appropriate. As always, we are here to help you with any questions. We look forward to continuing to service you and thank you for your trust in our team.

Respectfully submitted,
CRA Financial, L.L.C.

Second Quarter 2018 Review

Second Quarter 2018 Review

Market Overview

The quarter was marked by a continued rally in the U.S. Dollar sparked by strong U.S. growth and economic data, much to the detriment of emerging market stocks and commodities (with oil being the only exception).  The quarter was roiled by tariff posturing, most notably between the United States and China.  Although President Trump softened his trade stance in recent days, the projected tariffs are still due to take effect as soon as July 6th.  Needless to say there is still a fair amount of angst and a high level of uncertainty associated with the lack of resolution, even at this late date.
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First Quarter 2018 Review

First Quarter 2018 Review

Market Overview

The overwhelming story of the 1st quarter of 2018 was the return of volatility to our financial markets. In the past quarter, investors saw the S&P 500 experience 6 trading days of plus or minus 2% moves; something that did not occur during a single trading day in 2017. The stock market in 2018 is proving to be more sensitive to political posturing, threats of a trade war, rising interest rates, and inflationary fears. This volatility, however, is far from abnormal with a 12% decline at some point during each year being the average. Lack of volatility during 2017 spoiled investors.

CRA Financial First Quarter 2018 Review

Equity Markets

The quarter started out similar to last year, with the S&P 500 advancing 5.62% in January. In contrast, February and March proved to be a bumpy ride with the stock market retreating 3.89% and 2.69% respectively. The U.S. stock market saw a 1.22% decline compared with a 2.38% decline in developed international equities where the potential risk of a trade war is causing economic uncertainty in a similar fashion. International emerging market equities continued to be a bright spot for investment illustrating a 0.91% return for the first quarter due to improving economic conditions and earnings growth.

International Trade and the Markets

With the announcement of steel and aluminum tariffs and the more recent tariffs of up to $60 billion on Chinese imports, there is the potential for an increased risk of a trade war. A trade war would mean that tariffs are raised steeply and broadly across a range of products and potentially across multiple countries. A trade war among major countries hasn’t occurred in over 90 years but the results have been very bad for economies in the past. Most research and analysis indicates that the current situation would not be expected to deteriorate to this level; however, renegotiating existing trade agreements will have an effect on different businesses/sectors of the economy. Trade announcements from the current administration will likely continue to create volatility in the financial markets, most likely in the short-term.

Tech Stock Challenges

The very large and news grabbing FANG stocks (Facebook, Amazon, Netflix, Google) experienced challenges during the past quarter. Facebook, Twitter, and Alphabet (Google) in particular have recently found themselves in regulators’ sights due to concerns that privacy laws may have been violated. This could lead to more regulatory oversight causing an increase in operating costs. While the recent volatility in these stocks correlates somewhat to the rest of the NASDAQ, the NASDAQ as a whole actually still posted a positive gain for the quarter of 2.32%. The 7.36% gain of the NASDAQ in January perhaps was the market overbuying these stocks as they were 2017 winners.

Bond and Credit Markets

In March the Federal Reserve raised its benchmark 25 basis points to the range of 1.5% to 1.75%, marking the sixth time since the financial crisis that it has raised rates. The Fed also reiterated its forecast of three hikes for this year, meaning it expects two more for 2018. Given this backdrop of steadily increasing rates, fixed income markets were challenged during the first quarter. Both U.S. fixed income and global high yield were down 1.5% and 0.4% respectively. Municipal bonds also saw a 1.1% decline. In light of higher volatility, cash outperformed most other assets classes, returning a meager 0.3%.

The 10-year U.S. Treasury ended the quarter with a yield of 2.74%. The yield curve remains relatively flat.

Perspective for the rest of 2018

Looking to the rest of 2018, it is expected that market volatility will remain as it is the norm for stock markets. With that being said, analysts expect corporate earnings to continue to grow through the rest of 2018. Traditional stock market fundamentals remain supportive of an ongoing bull market and, in fact, the Index of Leading Economic Indicators rose again in March, continuing its robust upward trend. While sticking with an investment in stocks is more difficult when they aren’t moving straight up, the long- term return that these investments provide is often needed for investors to reach their financial goals. At CRA, we will continue to monitor our markets and portfolios carefully and thank you for your continued relationship with our firm.

Respectfully submitted,
CRA Financial, L.L.C.

2017 – The Year in Review

2017 – The Year in Review

2017 Year in Review Early Predictions

Heading into 2017, many analysts were predicting a modest year for investors. Fresh off the end of 2016 where stocks rallied strong in the fourth quarter to finish up almost 12% (S&P 500) for the year, both Credit Suisse and Goldman Sachs were predicting an S&P 500 return for 2018 of less than 3%. Further, many analysts were also predicting a rough ride for the bond market, where it was widely believed that rising interest rates would cause most bond returns to be flat or negative for the year. The S&P 500 posted a total return of 21.31% for 2018, its best year since 2013. And, although the Fed (FOMC committee) raised short-term interest rates three times in 2017, the long end of the interest rate yield curve (as indicated by the 10 Year US Treasury Rate) actually declined slightly during 2018, starting the year at 2.45% and finishing 2018 at 2.40%. The US Bloomberg Barclays Aggregate Bond Index finished 2017 with a respectable 3.54% return. If the last two years have taught us anything, it is that forecasting elections or market returns is a fool’s errand.
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Forth Quarter 2017 Overview

Forth Quarter 2017 Overview

Market Overview

Amidst a backdrop of unusually low volatility, United States and a broad swath of world equity markets rose sharply during 2017, based upon the expansion of 45 separate global
economies. The US broad market advanced 20.52% for the year, 6.2% coming during the final quarter. Developed international and emerging international markets climbed 25% and 37% respectively during 2017, while posting end of quarter gains of 4.23% and 7.44% respectively.
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Third Quarter 2017 Overview

Third Quarter 2017 Overview

Market Overview

Global markets continued their broad advance during the third quarter 2017. Thus far 2017 has been a year where all major asset classes have advanced with international equities leading the field. Could we now be at an inflection point?
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Mid-year Market Overview: Will the rally continue?

Mid-year Market Overview: Will the rally continue?

rallyRALLY: The markets are off to a great start so far in 2017. The S&P 500 closed the second quarter with a strong year-to-date gain of 9.34% (Total return including dividends). Investors saw a market that remained resilient in the face of uncertainty and volatility was kept at bay. Corporate earnings remained strong, global economies have been improving, and major central banks across the world have continued support. Markets shrugged off repeated global terrorist attacks and a seemingly stalled presidency as a gridlocked Congress wrangled with the questions of the government’s appropriate role in the U.S. health care system.
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Market Timing: How far will the market continue to move higher, before the drop arrives?

Market Timing: How far will the market continue to move higher, before the drop arrives?

How far will the market continue to move higher, before the drop arrives?The 10 bear markets since 1929 combine for an average market drop of 45% over an average duration of 25 months. The bull markets that have preceded/followed those 10 bears have generated an average return of 154% over an average duration of 54 months. The current bull market, which began on March 2009, is well above those averages. The bulls just celebrated the 8th anniversary, and have cheered market gains of 231% through the end of 2016. With the market continuing to post impressive gains to start 2017, many investors are increasingly worried that a “pullback” is on the horizon. This increasing pessimism has many investors asking; “Is it possible to time the market?”
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Second Quarter 2017 Overview

Second Quarter 2017 Overview

Market Overview

Global stock and bond prices broadly advanced during the first half of the year during a period absent of volatility. Investors attribute the rally’s breadth to strengthening corporate earnings, improving economies and continued support from Japanese and European central banks. Markets shrugged off repeated global terrorist incidents, while a seemingly stalled presidency and gridlocked Congress wrangled with the question of the government’s appropriate role in the US health care system. After soaring to a 14 year high right after the Trump election, the US dollar has now weakened, declining by 5.6% over the last six months against other major currencies.
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Annual 2016 Market Overview

Annual 2016 Market Overview

Annual 2016 Market Overview

December 31, 2016

During 2016, the US stock market posted its best performance since 2013 after shaking off a horrific start of the year that concluded with the DJIA dropping to a two-year low of 15,660 on February 11th. The index of 30 Blue chip stocks would ultimately end the year plus 26% from that low watermark and closed the year with an annual gain of 13.42%.

Reversing course from the previous year the energy sector was the biggest gainer of the S&P 500 advancing 27.36 % during 2016 after experiencing 2 years of declines. Financial stocks
(+ 22.80%) also performed very well particularly in the latter part of the year benefiting from the prospect of less regulation coupled with a more aggressive plot of higher interest rates going forward after the Federal Reserve finally raised rates in December, for only the second time in the last 9 years.

The Russell 2000 was up 19.48% in 2016, far outpacing gains for the Dow and S&P 500, trading on the thesis that its components are more focused on the US economy, which at the moment, looks more promising than companies operating abroad.

Equity Markets 4th Quarter

The small cap Russell 2000 was the best performing equity asset class in the 4th Qtr. with a return of 8.43%. The DJIA was a close

second at 7.94%. The NASDAQ lagged with a return of just over 1.34% as the S&P Value Index clearly outperformed the S&P Growth Index by a notable 9.17% during 2016.

International Developed had a 2016 calendar year loss of (-1.88%) as well as (-1.04%) quarterly loss respectively. Facing the headwind of a stronger US $ Emerging markets continued to struggle losing (-4.56%) in the 4th quarter, but did advance 8.58% for
the year due to an early year rally.

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