Please enjoy market commentary each quarter from Chief Portfolio Strategist James W. Underwood, CFA.

Cash is King

January 2019

Cash rarely tops any list of best performers, but against a backdrop of rising interest rates and collapsing stock prices, cash was king in 2018.

Market Turmoil

Heading into the final quarter, the S&P 500 (up +10.6% YTD) was poised to deliver its tenth consecutive calendar-year increase (including eight double-digit annual advances). However, the positive momentum ended abruptly as uncertainty surrounding multiple U.S. economic growth policies – monetary, fiscal and trade – elevated recession fears, sending stock markets sharply lower. The S&P 500 declined 13.5% over the final three months of 2018, resulting in a 4.4% loss for calendar year 2018.

Quarterly market collapses can be both emotionally and financially challenging, but rarely have represented longer-term risks. Q4 2018 marked the twelfth double-digit quarterly decline in the last forty years. Reviewing the eleven previous sell-offs, on average the S&P 500 doubled over the subsequent five-years. The next five years may not look anything like the historical average, but often these market declines can be healthy for the stock market, reducing momentum driven risk-taking, excessive investor optimism and improving valuation metrics, providing a more stable foundation for future growth.

Digging deeper into the quarterly market turmoil, the extreme losses were felt across the capitalization spectrum, reaching 20% within smaller cap stocks. From a style standpoint, value modestly outpaced growth for the quarter, but no style box was left unscathed for the quarter or the year.

Reviewing sector results, seven of eleven sectors experienced quarterly declines greater than 10%. The only area that ended the quarter higher was the defensive Utilities sector, climbing 1.4%. On the opposite end of the spectrum, the Energy sector was crushed under the pressure of falling oil prices, declining 23.8% during the period.

Outside the U.S., foreign markets paralleled U.S. markets down, but unlike their domestic counterparts, they did not start the quarter with a cushion of YTD positive returns to insulate against market declines. Thus, while the quarterly market sell-off turned a good year for U.S. stocks into a bad year, the market rout turned a bad year for foreign markets into a significant market correction. Losses exceeded 10% for the quarter and year across most of Europe and the Asia-Pacific region with very few country-level exceptions. In aggregate, developed non-U.S. markets declined 12.5% for the quarter and 13.8% for the year, as measured by the MSCI EAFE Index.

Fixed Income Review

Short-term rates moved steadily higher throughout 2018 as the Federal Reserve continued their rate normalization process, raising the Fed Funds rate four times. Longer-term yields followed short rates higher much of the year, creating significant headwinds for long duration fixed income strategies. By early November, the Bloomberg Barclays Long-Term Treasury Index had lost approximately 9.5% year-to-date. However, as fears of a recession climbed, yields declined resulting in a dramatic year-end rally.

By year-end, the Treasury yield curve had very little “curve”. The spread between ultra-long bonds and ultra-short bonds was less than 0.6%. Why would an investor accept significantly more interest rate risk for only 0.6% in premium? The investor expects the Federal Reserve to reverse course and lower, not raise, rates. In fact, despite the Fed’s projection for three additional rate hikes, the market has priced in no hikes in 2019 and a rate cut in 2020. Yields will likely continue to be volatile as market expectations and Federal Reserve projections reconcile.

Outside of the Treasury sector, spread performance was mixed during 2018. Corporate bonds lagged as investors demanded additional premium for perceived heightened credit risk, while agency mortgage-backed securities ended the year modestly higher. Against this extraordinary backdrop with yields and spreads rapidly changing, investment-grade bonds ended the year one basis point higher, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index.

Finally, outside of the taxable bond market, municipal bonds held up relatively well, posting modest increases across most maturities as investor demand for tax-exempt income remained high.

Satellite Strategies

As market fear climbed, gold was the big winner during the fourth quarter, gaining 7.2% as measured by the S&P GSCI Gold Index. Outside of gold, losses were seen across the investment landscape. Hardest hit were MLPs which cratered under the weight of falling oil prices, tax-loss selling, and general market anxiety. For the year, performance dispersion was wide, but there were very few areas that avoided negative territory.

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Off to the Races

Written by Jim Underwood, CFA, Chief Portfolio Strategist

As we approach November 8th, I am repeatedly asked, “How will the outcome of the upcoming elections impact investment markets, and which is better for the stock market – Republican leaders or Democratic?” My honest, easy answer (or non-answer) is always – “it depends”. However, let’s see if any broad generalizations can be made based on historical observations.

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Why High-Net-Worth Individuals Need a Wealth Management Plan

Written by By Harvey Hutchinson, CFP®

For high-net-worth individuals, wealth management becomes more of an important demand with each passing year. According to the Spectrem Group, the number of U.S. households with a net worth between $1 million and $5 million has grown 6.2 percent to a total of 10 million, which is the largest year-over-year increase since the 2009 recession.

Whether through inheritance, successful business ventures or dividends from investments, newly found wealth is leading more individuals to seek comprehensive financial consultation that not only preserves wealth, but also builds and protects it.

If you find yourself in a situation where you could benefit from a new investment framework – especially one that integrates financial planning and portfolio management to create opportunity and manage risk – then you likely have a few questions about what steps must be taken.

We have found that many of these questions revolve around three central elements: time, talents and relationships.


Is your wealth demanding more time from you? Can wealth buy you more time? Which is more valuable to you: time or wealth?

We understand that our clients are extremely busy in their professional and personal lives. With so many items on their daily to-do lists, it is easy to lose track of long-term financial performance. By continually monitoring performance and tracking against defined goals and industry trends, our team of advisors takes on the responsibility of monitoring and managing your wealth. We regularly communicate performance and work with you if we recommend pivoting strategy to accommodate for changes in your portfolio or to adjust for market trends.


Do you want to follow your passion? Do you wish to employ others to expand your impact? Would you like to develop a budding talent but lack the freedom to do so?

Unless you struck big on the lottery or had a fortunate roll of the dice in the casino, luck is unlikely to have played a part in your financial success. In a Spectrem Group survey of individuals with a net worth between $5 million and $25 million, hard work, education and smart investing are reported as the primary reasons for their sources of wealth.

We examine every financial decision through the lens of each client and make recommendations that best serve your interests while maximizing existing talents. By prioritizing your goals to inform a tailored financial plan, we strive to enhance your portfolio and leverage your resources and assets to achieve financial success.


How has wealth impacted your lifestyle? Is wealth moving you closer or further away from loved ones? Do close acquaintances treat you differently because of your wealth?

Financial wellness doesn’t ensure happiness. At times, it can create obstacles between you and your family and friends. It can also create unwelcomed advances from those seeking financial aid, or in extreme cases, make you a more likely target for frivolous lawsuits.

At Welch Hornsby, we believe investment success is both defined and measured by accomplishing what is important to you and your family. While some of the adverse effects of having a high net worth are inherently tied to an individual’s experiences and journey towards financial prosperity, we look to mitigate these issues by serving as trusted advisors who you can rely on to provide objective consultation.

If you have been asking yourself any of these questions, we at Welch Hornsby invite you to have a conversation about how our committed team of financial advisors can work with you to alleviate these concerns and ensure you and your family enjoy financial success for generations to come. Contact us today.

The information and data contained herein has been obtained from sources believed to be reliable, but is in no way guaranteed by Welch Hornsby as to its accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.

The information contained in this communication may be privileged and confidential and protected from disclosure. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify us immediately by replying to this message and deleting it from your computer.

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