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Q4 2018 Quarterly Commentary


  • Global stocks were crushed in the fourth quarter of 2018.

  • From a relative strength perspective, our asset allocation models rank the asset classes in order from strongest to weakest as follows:

    • Equities:  US Large Value, US Large Growth, International Emerging, International Developed, Small Cap Stocks

    • Fixed Income:  Treasuries, Investment-Grade Corporate Bonds, High Yield Corporate bonds
  • Our asset allocation changes reflect the above through an overweight to value over growth, large cap over small cap, domestic over international, emerging markets over international developed, and Treasuries over high yield.

  • Bonds are in a positive trend, so risk mitigation strategies have shifted into Treasuries and intermediate-term bonds.

  • From a valuation perspective, US markets remain highly valued according to historically reliable measures of fair value. This implies below average returns over the next 10-12 years.

  • Fed policy remained tight through the 4th quarter. We experienced short-term yield curve inversions and expect the Fed to move dovish in 2019.

  • Economic growth remains positive in the US, although growth has slowed considerably since peaking in the 2nd quarter.  We expect growth to continue to decelerate through at least the first half of 2019.

  • Market sentiment shifted negative for risk assets in the fourth quarter.  Credit spreads widened considerably, equity markets broke into negative trends, and defensive assets and factors rallied.

  • We ended the quarter with 4 of the 4 components of our framework flashing red.  

  • The current playbook is defensive and favors low volatility equities, Treasury bonds, cash, and risk mitigation strategies.

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