2019 1st Quarter Market Update

April 10, 2019

Schmolke Investment Team Market Update

We predicted a good year in 2019 as y’all may recall, so here is our quarterly update on what’s going on so far in 2019.

Most economists have said that the U.S. economy will slow in 2019, along with the rest of the world. But, consider that our economy grew at just below 3% GDP during 2018 and there was a market correction during the fourth quarter. It appears that the average predicted growth for 2019 will be 2.4% GDP, but that’s really not that bad. Consider during eight years of the Obama Administration, we saw average growth at 2.1% GDP per year (1) and we still had a bull stock market the entire time. Consequently, the Trump administration is seeing average comparable growth at 2.9% per year so far.

Lessons We’ve Learned:

The one primary thing that drives all stock markets over time is the direction of the U.S. and global economies. There are a lot of other things that cause volatility but if the economies are doing well that translates into stock market growth and the reverse is also the same. Fortunately, over the past 37 years (since 1982), we have been in a growing economy with some short recessions thrown in the mix. Ultimately, we believe this will continue.

The economy is slowing down this year and there are a lot of fears that we are heading into a recession or a bear market. Markets are sometimes emotional in that fear alone can drive them down, along with politics, wars, geopolitical events, tweets, debt concerns and all sorts of crazy things. Recessions happen every so many years, it’s just part of the cycle. We are in the longest bull market now (over 10 years) and it appears to want to keep going for the foreseeable future.

Current Data:

The Standard and Poor’s 500 (S&P 500) had its best performance in 10 years gaining 12.3% in the first quarter of 2019 (2) according to CNBC research. After a correction in the fourth quarter of 2018, which made no logical sense, we find ourselves back in a growth mode. According to FactSet, a data organization and information management company, the average earnings gain of S&P 500 companies last year was 20.1 percent. Based on this data, the stock market should have been up substantially in 2018, but it wasn’t. From our perspective, fear was the big driver, along with political issues and global issues, and in 2019 we see the market continuing to improve.

Whenever fear or other such catalyst diverts the growing trend of the markets, the market will eventually revert back to its mean or its long-term trend. This is what happened in the first quarter of 2019.

When Recessions Happen:

Recessions just don’t happen overnight, many leading economic indicators flash warning signs 12 to 18 months ahead of time, as demonstrated in the chart below. This data shows some of the leading economic indicators are starting to flash red now but not all. As of the end of March, about half of the indicators are flashing red, but keep in mind this can also change back to green.

So, this is not negative at this point. Overall, the U.S. Weekly Index of Leading Indicators (ECRI) is still positive and moving up but really tells us nothing about any coming recession (3).

What Interest Rates Tell Us:

The 10-year treasury bond yield vs. the 3-month treasury yield is also considered another one of the leading economic indicators. When short-term rates climb higher than long-term rates (inversion), this is thought to hurt financial institutions lending capabilities, which will at some point kill a growing economy. For this to have any effect on lending, this interest rate inversion must stay inverted for multiple months in a row. This happened on March 22, 2019 (3) but reversed on that same day.

Every recession over the last 60 years has been preceded by an inverted yield curve like this according to the San Francisco Federal Reserve (4). Accordingly, curve inversions have correctly signaled all nine recessions since 1955 and had only one “false positive,” in the mid-1960’s, when an inversion was followed by an economic slowdown, but not an official recession. Note that a recession is a significant economic slowdown, which there are two consecutive quarters of negative economic growth measured by our country’s GDP (5).

The challenge is that the inverted yield curve cannot predict exactly when a recession will happen, but many economists say that it happens months before a recession.

Looking Ahead to Remainder of 2019:

We believe the stock markets are fairly valued at this time and that corporate earnings will continue to grow. The corporate tax cuts that went into effect last year are just now starting to play out in better earnings for many companies. From our reading many industry articles and data from economists, the general consensus is the S&P 500 could see another 10% growth over the next 12-months. Therefore, we remain fully invested at this time and It appears we should have a prosperous 2019 and into the first quarter of 2020 from our perspective.

We appreciate your business and trust in the Schmolke Investment Team. We are watching over the economy and the markets every day, so you can feel confident in your investments and know that we are on the job.

We also appreciate you referring someone you know who might benefit from our services. We are dedicated professionals and can only grow our expanding business in this manner. Please contact Brian at (308) 448-3201 or email: bbschmolke@fscadvisor.com if you have any questions or wish to refer a friend.

Kind Regards,

Schmolke Investment Team

Brian Schmolke

Bart Schmolke

“Experience Matters”

This contains forward looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.

Investing involves risk including the potential loss of principal. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

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2019 1st Quarter Market Update