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www.wbjournal.com • Worcester Business Journal • 2 019 Economic Forecast 29 S P O N S O R E D B Y T he 2017 "just right" Goldilocks market acted as if risk no longer existed. Statistically, a correction of 5% to 15% was highly likely and occurred twice in 2018. Markets for 2019 will likely be Fat and Flat. A lot more volatility with modest returns. CASH "Cash is king." U.S. stock markets are, due to two corrections, properly valued and economic conditions have many investors nervous. Over the past 25 years I have heard many prophesize a "doomsday scenario," although 2008 was the scariest market by far since the Great Depression of the 1930's, it is unlikely to occur given the resilient US economy. →Consider increasing your cash position to be positioned appropriately if the market corrects 10% to 20% like it did in 2015, 2016 and 2018. Due to rates rising an allocation of 20% would seem prudent for diversification and reduced volatility. BONDS Short term US interest rates are likely to continue to march higher, while central bankers begin to dial down, accommodating policies. High quality bonds are poised to earn meager returns in 2018. Eighty seven percent (87%) of a bonds performance is attributable to its coupon and today the AGG is yielding 2.57%. Source - Bloomberg Barclays U.S. Aggregate Bond Index (AGG) of 12/07/18. In the global landscape of fixed income options, U.S. investment grade corporates offer a compelling mix of yield and diversification potential. Like 2018, be wary of long duration government bonds. Values can lose principal as rates rise. Don't fight the Fed! →Consider underweighting fixed income. Government bonds may keep pace with inflation so look to corporate bonds. Consider reducing U.S. high yield debt due to increased risk. Bonds play a valuable role. They help to stabilize riskier assets like stocks when volatile or uncertain times occur. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values vary, and will decline as interest rates rise. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds (grade BB or below) are not investment grade securities, and have higher risk than those graded BBB and above. International debt securities involves special additional risks, such as currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. US STOCKS Fiscal stimulus and a high, fairly level of confidence by CEOs are maintaining strong US growth. 3% GDP and S&P earnings of 20% is why. Valuations were a little expensive in 2018, but it does not mean that stocks cannot continue to climb the wall of worry. Small Caps tend to outperform Large Caps when the Federal Reserve Board raises rates in a healthy economy, current economic conditions, tax cuts, reduced Twenty percent (20%) plus corrections typically only occurs when we are in a recessionary environment, which is just not the case today. (Reference Leading Economic Indicator Index). We are witnessing stronger global growth and the U.S. expansion continues to mature. Corporate earnings have accelerated across the economy in the past several years, expect those to decline but still be very strong. We are experiencing heavy profit margins and robust economic growth. →Consider a blend of growth and value, reasonable valuations and low PEG ratios like Financials, information Technology, Consumer Discretionary, and Health Care. As with all investing, stocks investing has risk including loss of principal, and the prices of small cap stocks are generally more volatile than large cap stocks. Because of their narrow focus, investing in specialized sectors maybe subject to greater volatility and special risks than investing more broadly across many sectors and companies. INTERNATIONAL STOCKS Valuations are much cheaper than U.S. but have not been for years? Despite a growth slowdown, earnings expectations remain positive. For those looking for maximum return willing to take on risk, you should consider emerging markets. But fundamentals do need to improve due to bear market conditions in that space. Historically, periods of underperformance by international equities have been followed by periods of outperformance, but this has not taken place and we do not think 2019 is the year that it will. Increasing international equities would be a contrarian play. →Consider a small allocation of international equities within a global portfolio. Consider strategies that pursue opportunities in emerging markets. When investing internationally, it's important to remember there are special risks such as currency fluctuation and political instability, which may not be suitable for all investors. These risks are often heightened for investments markets. ALTERNATIVE INVESTMENTS Generally defined as any investment that is not a stock or bond. This consists of investment like Real Estate, Commodities and Currencies, etc. We believe this asset class is important going forward. Some investments are designed for income and others growth. Research should be conducted to discover which is appropriate for you. Some investments may not be suitable. Make sure you work with an investment fiduciary to try to uncover any potentially hidden gems. →Consider a shift of some of your portfolio from stocks to alternative investments to potentially lower stock market risk while increasing return opportunities. You will also want to consider special risks and alternative investments, such as leveraging the investment, potential adverse market forces, regularly changes, potentially illiquidity, and that strategies could accelerate the velocity of potential losses. The Bottom Line: Use Stocks, Bonds and Alternative Investments for True Diversification Most investors are using some combination of stocks, bonds, alternatives, and cash. The global economy and other factors have changed and the traditional approach of a portfolio of 60/40 stock to bonds ratio, in place since the inception of the Modern Portfolio Theory of 1952 is outdated for some. This leaves many scratching their heads and wondering why what's worked before may not hold true in 2019. Alternative Investments have been used successfully by endowments for years 1 , they are less correlated with traditional investments. This means they may perform differently from each other under the same market conditions and provide further diversification, lower portfolio volatility, and potentially increase returns. Lowering risk is a more critical factor in 2019, having to fight your way back from losses can be a real portfolio killer. Work with an advisor with cutting edge analytical tools to turn volatility into opportunity, a critical move in 2019 impacting your portfolio for the short and long term. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. No strategy assures success or protests against loss. n Economic Forecast For Investing Factors and moves to consider: Roadmap to Investing in 2019 P R O V O wealth management group Alternative investments provide investors with exposure to markets and investment strategies that cannot be accessed through traditional fixed income and equity markets (such as real estate, commodity or natural resources). Investing in these investments is speculative, not suitable for all clients, and intended for experienced and sophisticated investors who are willing to bear the high economic risk of the investments." 1Source: From 6/30/2002-6/30/2012, an equal weighted average of 506 University Endowments returned 6.2% compared to the S&P 500® Index average return of 5.3%. 2012 NACUBO Endowment Study, Annual Report of the National Association of College and University Business Officers Endowment Performance and Management in Higher Education, 2013. e S&P 500 Index is unmanaged and available for direct investment. Past performance is no guarantee of future results. Allocations for endowment funds may not be suitable for the average retail investor considering various factors, such as volume of invested funds and respective risk tolerances. Additionally, the performance shown may not be indicative of any results of a retail investor. Correlation is a statistical measure of how closely two securities move in relation to each other. A high (positive) correlation implies the securities gener- ally move in a similar direction, whereas a low (negative) correlation implies the securities generally move in opposite directions. H I G H E R E D U C AT I O N