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Klingman Insights
December 18, 2018
Dear Valued Client and Friend:
The holiday season has certainly not brought any good cheer from global equity markets. The recent declines have been swift and significant. Since peaking less than three months ago on September 20, the S&P 500 has declined 12.9% as of yesterday's close. Large Cap US equities have actually held up better than Small Cap US equities and Global equities. Small Cap US stocks as measured by the S&P 600 index are now down 22% from their August 31 peak. Non-US Developed equities are down 18% and Non-US Emerging Market equities are down over 22% from their January peaks.
The excellent returns for global equities in 2017 now seem like a very long time ago. The press will spend a lot of time discussing whether this is a correction or a bear market, but putting the semantics aside, there has been a significant pull back in equity prices.
What has been the driver behind these declines? Initial concerns were mainly around the Federal Reserve continuing to raise interest rates and tighten monetary policy, as well as the increased uncertainty around US trade policy and potential tariffs. These initial concerns have evolved into more general concerns about a global economic slowdown as indicated by some recent statistics out of China and Europe. While US economic growth remains a bright spot, recent data, particularly regarding the US housing market, suggest that the rate of growth may be slowing.
As we discussed in our October Outlook, we continue to believe the likelihood of a recession in the US in 2019 to be very small. Some of the weaker recent economic numbers, as well as the decline in equity prices, will probably lead the Federal Reserve to be much more cautious about interest rate increases heading into 2019. Having said that, predicting economic growth and equity performance in the short term is a difficult, if not impossible, task. Long term performance of equities is based on the earnings of the companies you own. Based on yesterday's close, the S&P 500 is trading at approximately 14.5X our projected 2019 earnings. In our opinion, this represents an attractive valuation.
We continue to actively tax loss harvest our taxable accounts and rebalance client portfolios to take advantage of these attractive valuations.
Hopefully the non-financial craziness of the holiday season will distract you from the financial headlines, but, as always, if you have any specific questions don't hesitate to reach out to any of us.
Happy holidays and best wishes in the new year!
Best,
Gerry