Q1 Market Update - AssetMark

Fourth Quarter 2018

Jason Thomas

Let the Good Times…Slow

Jason Thomas, Ph.D., CFA

Chief Economist

AssetMark, Inc.

The story
After returning 11% through the first 3 quarters of 2018, the S&P 500 tumbled 14% during Q4, bringing the annual total return to -4%. Amid indications that global growth has slowed, market commentators and politicians have called for the Fed to pause further interest rate increases. The Fed Funds futures market is pricing a 54% probability of no change to the fed funds rate by the conclusion of the December 11, 2019 meeting and a 35% probability of a reduction of 0.25%.1

The reality
Say what? The US economy is clearly, thankfully, slowing from an unsustainably high rate to a level which is still above its structural potential. The unemployment rate is so low that we economists are scratching our heads (with all three hands!), wondering why there is no wage growth. And, even after the almost-bear market, broad US financial conditions are still more expansionary than just prior to the first interest rate increase of this cycle (in December 2015).

US Financial Conditions

As of January 2, 2019. Financial conditions represented by the Goldman Sachs US Financial Conditions Index. Source: Bloomberg.

The bottom line
The current fed funds rate is 0.75% below the low end of mainstream estimates of the neutral rate, and those estimates are well below the long-term historical average. The bottom line is that the current fed funds rate is too low and must go up next year. While market anxiety may result in volatility, there is no reason to believe that 2-3 increases in 2019 would push the economy into recession.

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View Q4 Market Update

1 See https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html.

Asset Class Index Description
US High Yield Bloomberg Barclays US Corporate High Yield Measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The index excludes emerging market debt.
US Short Treasuries Bloomberg Barclays US Treasury 1-3 Year Measures the performance of short term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of between 1 and 3 years, are: non-convertible, denominated in US dollars, rated investment grade, fixed rate, and have $250 million or more of outstanding face value.
US Long Treasuries Bloomberg Barclays US Treasury Long Measures the performance of long term government bonds issued by the US Treasury. It includes all publicly issued, US Treasury securities that have a remaining maturity of 10 or more years, are: non-convertible, denominated in US dollars, rated investment grade, fixed rate, and have $250 million or more of outstanding face value.
Global Equity MSCI ACWI A free float-adjusted capitalization weighted index that is designed to measure the equity performance of countries considered to represent both developed and emerging markets.
International Developed Equity MSCI EAFE A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of countries considered to represent developed markets, excluding the US and Canada.
Emerging Markets Equity MSCI Emerging Markets A free float-adjusted market capitalization index that is designed to measure the equity market performance of countries considered to represent emerging markets.
US Equities S&P 500 A cap-weighted index that is generally considered representative of the US equity market, consisting of 500 leading companies in leading industries of the US market capitalizations are generally above $5 billion representing approximately 80% of available market capitalization.
US Small-Mid Cap S&P 1000 An cap weighted index that is generally considered representative of the US equity market, consisting of 1000 small and mid-size companies in the US. It combines the S&P Mid-cap 400 and the S&P Small cap 600. Market capitalizations are generally between $400 million and $5.9 billion.
Bank Loans S&P/LSTA US Leveraged Loan Index Measures syndicated loans based upon their capitalization using market weightings, spreads and interest payments. The index covers the US market back to 1997 and currently calculates on a daily basis.
Managed Futures SG Trend The index calculates the net daily rate of return for a pool of trend following hedge fund managers that is equal weighted and reconstituted annually.
Cash Citigroup 3 Month T-Bill An unmanaged index of three-month Treasury bills.
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C33339 | 1/2019 | EXP 01/31/2020
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IMPORTANT INFORMATION
This report is for informational purposes only, is not a solicitation, and should not be considered investment advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. It is not possible to invest directly in an index.

Investments in mutual funds and exchange traded funds that hold equities, bonds, and other securities can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments. Investments in bonds and fixed income related securities also involve market and interest rate risk (prices can decline, if interest rates increase), and default risk (an issuer being unable to repay principal and interest). High-yield bonds are generally subject to greater risk of default and volatility, than investment-grade bonds. Real estate investments are subject to credit and market risks, typically based on changes in interest rates and varied economic conditions. Investing in alternative investments, including managed futures, commodities, and currencies is not appropriate for all persons, as the risk of loss is substantial. Investments in futures involve market, counterparty, leverage, liquidity, interest rate, foreign currency, commodity, volatility, and other risks.

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Jason Thomas is also Chief Executive Officer & Chief Investment Officer of Savos Investments, a division of AssetMark, Inc. Savos Investments is a division of AssetMark.

AssetMark, Inc. is an investment adviser registered with the Securities and Exchange Commission.

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