This Month’s Newsletter

A Look Back and a Look Ahead Join our Monthly Newsletter January 2019

Carl W. Hafele, CFA, CPA

Co-CIO, Principal

2018 – Ugh!

After a rather rosy 2017 that included very little volatility and strong equity markets, investors’ memories were gently awakened in 2018 of the risks associated here and abroad. The 4th quarter was as brutal as it gets, and brought all risk-on asset classes to negative returns for 2018. We are glad to usher in the new year with big smiles despite a rather rocky start!

Volatility, tariffs and Fed tightening were the most influential items in the markets in 2018. The first three rules of investing – diversify, diversify and diversify – simply did not work, as virtually all asset classes experienced negative returns that were highly correlated. This has happened only a few times over our lifetimes – in 1974 and 2008 – which means odds are extremely high it won’t happen again in 2019.

2019 – So What’s In Store?

Two very influential items for the markets are interest rates and S&P 500 earnings.

As you can see, Fed chairman Powell has ratcheted up short term rates materially in the “normalization” process, cautiously undoing the central bank moves associated with the Great Recession. The Fed controls the short end of the yield curve, but investors’ inflation expectations strongly influence the long end. Longer rates have changed but by far less, suggesting low rates may be with us longer than most believe!

S&P earnings growth rate of ~20% in 2018 was indeed remarkable with most of the advance being attributable to the tax law changes. This brought valuation levels back in line relative to historic norms, as markets decreased and earnings increased. Over longer term periods, valuation means everything while in shorter periods, it means little.

At Lanier, we believe interest rates will not increase much if at all, as slower global growth and effects of the tariffs will cause the Fed to hit the pause button. We are also a tad skeptical of the S&P 500 achieving the 5-10% earnings growth rate most predict. Volatility is back for a while!

Long Range Rates of Return

We believe that investing should include looking at projected returns from the asset classes, not historic rearview mirror returns. Our 7-10 year projected annual rates of return are a conglomeration of our country’s largest financial institutions, endowment funds and consulting firms.

As always, we have a strong conviction that investors utilize both the traditional asset classes of bonds and stocks as well as alternative assets including hedge funds and real assets. The result is a similar or better return while taking significantly lower levels of risk with a lower correlation to the market over a market cycle.

Carl W. Hafele, CFA, CPA, is Co-Chief Investment Officer and Principal at Lanier Asset Management. He is also an instructor in Finance and Economics for the MBA program at Bellarmine University.