
Letter from Mike Schroeder
PWM President Mike Schroeder on the significance of Baird's 100th anniversary.
Through that lens, there were reasons to believe stocks could overcome the return of volatility in 2018 and start 2019 on firm footing. However, while history can provide guideposts, it is important to balance these against the current environment.
The upticks and rallies that have ended past election years were often due to the sense of certainty that comes from knowing the outcome. The market doesn't care who wins. It's just glad to have a big question answered. Yet, in the current environment, significant uncertainties remain.
TRADE MATTERS "Trade War" headlines have been with us since mid-2018, but the full impact of U.S. policy changes remains largely unknown. Will new tariffs paid by U.S. importers raise prices for consumers, impacting economic growth? Will companies that preordered products ahead of those tariffs pass on savings or choose to realize more profits, impacting corporate earnings? Will a newly divided Congress exercise its right to oversee trade matters and change U.S. policy?
The uncertainties above are part of why many anticipate slower U.S. economic growth next year. The key question is whether recent growth was a late-cycle sugar high (which could precede a meaningful reset in growth) or we continue to make secular progress toward higher, sustainable growth. While consensus is toward the former, we'll be keeping an eye out for the latter.
RATES ON THE RISE Confidence in the U.S. economy led the Fed to raise rates three times in 2018. While still relatively low compared to historical norms, higher rates and the Fed's transparency around additional planned increases are making U.S. investors uncomfortable. In 2019 we'll be watching the Fed's ability to assess economic strength and inflation in the context of evolving dynamics and to act (or not) accordingly.
TRENDLINES VS. HEADLINES The doom and gloom that dominated coverage of recent dips in major indices did little to help investors keep things in perspective. High valuations and excessive optimism have been consistent concerns for us in recent years. While not their intent, the media seems to have tempered investors' expectations and, as stock prices try to build a solid foundation to support a sustainable rally, these factors seem to be coming more into line. We'll continue to follow these and other key indicators as part of our Weight of the Evidence approach to market analysis throughout the year.
After four rate hikes in 2018, the Fed could slow the pace of tightening in 2019.
Economic growth could moderate in the year ahead, but improving productivity growth trends are a longer-term tailwind.
Valuations have moved in an encouraging direction, but stocks are not historically cheap and earnings growth may have already peaked.
Bullish investors have been slow to throw in the towel on stocks, and that has delayed the bottoming process.
Seasonal leadership trends have been slow to develop, despite favorable calendar considerations.
The new-low list remains elevated, and industry group trends show fewer areas of the market in up-trends.
PWM President Mike Schroeder on the significance of Baird's 100th anniversary.
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