Friends,

This quarterly client letter marks the first, in many, distributed to joint clients of KROST Wealth and KROST. Client letters are a long-time tradition in this industry that I value, and I hope you will too; as it is an opportunity to provide you with insights into the business, our economy, capital markets, and perhaps, a bit about me as well.

As you may know, I recently relocated here to sunny California from St. Petersburg, Florida with my partner Erika. In August, we welcomed our firstborn son Rowdy Joseph Clark. Yes—we both realize we are tempting fate with that moniker. The name, Rowdy, holds a special significance to us, as it’s a reminder of how we first met volunteering for the Tampa Bay Rowdies MLS franchise push. Needless to say, I have experienced lots of change since joining the firm in April of 2018. Starting this new chapter has not only been tremendously positive for my personal life, but it also marked a shift in my professional life as well. While I have been in this business for over 15 years, I am now able to provide my clients with a broader range of tax-centric services through my partnership with KROST, which is a game changer. I am truly excited for what this means for you and your financial future.

Now, let’s recap what we’ve seen recently in the market and economy.

State of the Market
The first three quarters of 2018 were defined by historic low volatility in the equity markets, but that drastically changed as we approached the holidays. U.S. Stocks registered double digit declines during the fourth quarter finishing the worst market year since 2008. Treasury bond yields fell as a flight to safety pushed the price of less risky assets higher. The worse performing sectors for the year were:

U.S. Small Cap Stocks -20.2%
Non-U.S. Small Cap Stocks -16%
And U.S. Mid Cap stocks -15.4%

Source: https://institutional.fidelity.com/app/popup/item/RD_13569_30073.html#slide18

The Fed
Despite pressure from President Trump via social media to keep rates low, the Fed raised policy rates for the ninth time this cycle. Chairman Powell signaled the Fed would monitor risks the market assigns to increasing rates, perhaps suggesting that they would back off future rate hikes. I believe Powell is aware of the power the fed has on the capital markets and will have a lighter touch on policy in 2019 than previously thought. I think it is very possible that we will see two rate hikes of a quarter each toward the end of the year but will be data dependent and may only be one. If we do see two hikes, I believe this is a solid sign for domestic growth.

The Fed Funds rate ended 2018 at 2.5%, up from 1.5% a year earlier.
Treasury yields ended at 2.44%, 2.45%, 2.63%, 2.51%, 2.69%, 3.02% for 1 and 3 months, 1,5,10,30 years, respectively.
Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2018

Flattening of the Yield Curve
The yield curve is very flat (short term rates and long-term rates are very close to each other). Some analysts take this information and point to recessionary talks. I think this is short sighted and an attempt to increase webpage clicks. In my opinion, the United States GDP continues to rise, albeit slower than before, due to the effect of tax cuts wearing off. While real GDP, as measured by both growth and inflation, and nominal GDP are both positive, it makes sense that we are in late stages of the market cycle, indicative of tightening credit, moderate growth and lower earnings estimates.

What to look out for
Investment-wise, consider rebalancing your portfolio and checking your risk tolerance as we may be in for a bumpy ride in 2019. Gain in the equity markets in prior years may still be over weighting your portfolio adding unintended market risk.

Look for areas to maximize your total return outside of traditional stock and bond investments, by possibly lowering your tax bill through increased deductions. It might be a good year to boost your charitable contributions.

To health, happiness, wealth and prosperity.

Philip Clark, CFP® | Director – Wealth Management

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