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The Week Ahead – Storm Clouds

| 1/7/19 8:12 AM

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

With global growth slowing and markets selling off, it’s only natural for investors to wonder how bad things might get. It was only a few short months ago that optimism was at all-time highs. Indeed, I have never seen such a rapid swing in investor sentiment in my 23-year career. With the pain of the Great Financial Crisis of 2008 still fresh in investors’ minds, many people assume another GFC may be looming.

There have been 11 recessions (two consecutive quarters of negative economic growth) since World War II. The average stock market drawdown for the first nine of those was 24%. The last two (early 2000s & 2008-2009) averaged a 53% pullback. It is important to realize the last recession was the worst one we’ve seen since the Great Depression. Therefore, it’s not reasonable to assume that if the economy slows, even to the point of going negative, we’re in for another 2008 scenario. In other words, there’s no reason to build an ark every time it starts raining.

We still maintain that the odds of a recession in 2019 are low. Predictions get more difficult the further out you go, but even if we knew there was a recession coming in 2020, history informs us getting out of the market beforehand would probably mean giving up meaningful returns. On average, the stock market goes up 41% the two years before a recession begins, and 23% twelve months prior.

Trying to time the market presents enormous risks. As history demonstrates, one could be stuck on the sidelines for years, missing out on significant gains. The fear of missing out (“FOMO”) can become overwhelming, causing investors to capitulate on their bearish outlook, buying back in at a higher level only to then be whipsawed. On the flip side, even if the market continues to fall while an investor waits on the sidelines, eventually they will have to decide when to redeploy. Unfortunately, many investors who sold in 2008 didn’t get back in for many, many years, doing permanent damage to their long-term wealth.

With all of that said, rest assured that we’re monitoring events carefully. Should our base case scenario – that a recession is unlikely – change, we will take decisive action by repositioning our portfolio allocations to be more defensive than they already are.

Next week, we will be looking forward to more guidance from the Federal Open Market Committee (FOMC). As of now, the fixed income markets are assigning greater odds of a rate cut than a rate hike for 2019. Barring any unforeseen change, we expect the Federal Reserve to reassert itself as data dependent – thus pausing its rate hike campaign and mitigating their efforts to normalize interest rates. This should be seen as good news for risk markets.

Data deck for January 7-11:

Date

Indicator

Period

Jan. 7

ISM nonmanufacturing index

Dec.

Jan. 7

Factory orders

Nov.

Jan. 8

NFIB small-business index

Dec.

Jan. 8

International trade

Nov.

Jan. 8

Job openings

Nov.

Jan. 8

Consumer credit

Nov.

Jan. 9

FOMC minutes

 

Jan. 10

Weekly jobless claims

1/5

Jan. 10

Wholesale inventories

Nov.

Jan. 11

Consumer price index

Dec.

Jan. 11

Core CPI

Dec.

Jan. 11

Federal budget

Dec.

    

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Brett Dulyea, CFA, CAIA
About the Author
Brett Dulyea, CFA, CAIA
Mr. Dulyea serves as a Portfolio Strategist on the investment team and is responsible for conducting manager research and executing investment strategies for clients. As a member of the investment committee, he provides market commentary and investment insights. Mr. Dulyea’s specializes in advising client portfolios, defining investment plans, and communicating the firm’s investment viewpoints. Prior to joining the firm, Mr. Dulyea was a Director, Portfolio Manager at Deutsche Bank. In addition to working directly with clients, he was a member of the Fixed Income Strategy Group and managed customized portfolios for clients. He previously worked in the Wells Fargo Wealth Management Group as a Vice President, Senior Investment Strategist and at Merrill Lynch as a Vice President, Portfolio Manager. Mr. Dulyea earned his Master’s in Business Administration (MBA) from California Polytechnic University, Pomona and holds the Chartered Financial Analyst® (CFA) designation and the Chartered Alternative Investment Analyst (CAIA) charter. He earned his Bachelor’s degree from the California Polytechnic University, Pomona. He also served as an adjunct Professor of Finance at California Polytechnic University, Pomona for two years. Read more
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