Proprietary Research

Monthly InsightsDecember 2018

Monthly CommentaryAs the year draws to a close and we look back at 2018, it has turned into a very good year for the U.S. economy. Not only did overall GDP growth accelerate, but many of the segments that were worrisome at the beginning of the year proved resilient in the face of adversity. In many respects, 2018 was the Goldilocks economy we had hoped for, stronger growth with low inflation. However, this has not translated into strong investment returns year-to-date. Markets around the globe have struggled. Certainly, they have not performed as one would expect with a robust economy.

Markets deviating from economic reality is not a groundbreaking phenomenon; it happens at times. Economic reality diverges from investment returns over short periods of time. Each time is different, but this time the reasons center around expectations of slower growth moving forward. Although the U.S. is still expected to grow, the rate of growth next year may be less. Two percent growth isn’t as good as three percent growth. In economic terms, this delta is called the second derivative of a dataset, and it has important ramifications throughout the investment world. Capital market assumptions include expectations for future growth. If future growth is lower, naturally the value of investments should be lower as well.

Strong economic growth also doesn’t mean everything is perfectly rosy. As I wrote last month, two of our Economic Dashboard indicators were on the verge of turning yellow. With December’s update, one indicator has turned yellow, the S&P 500 & 20-Month Moving Average. The good news is this is the only market-based indicator on the Dashboard and without signs from any of the other economic-based indicators, it may only be a minor glitch. It could easily turn back to green next month. However, it is worth taking notice and focusing our attention.

Markets are volatile at times, but they can also be forward-looking. Even without signs of economic distress, markets are telling us something that isn’t showing up in the data yet. It tells us that even though confidence is at high absolute levels, it may be declining. Not so coincidentally, the other indicator on the verge of turning yellow is the Year-Over-Year Change in Consumer Confidence. Taken together this means there may be a potential hit to confidence on the horizon that could lead to further market declines. However, unless the decline in confidence leads to absolute declines in economic data, the volatility may only be temporary.

U.S. interest rates are also on our radar. The first U.S. yield curve inversion occurred this past month. The interest rate on a 3-year treasury bond moved higher than the rate on a 5-year bond. While this is not one of the significant interest rate spreads used as a recession indicator, it is the first of many inversions we may experience over the coming years. Each one will carry more weight and will better signify a slowdown in the economy. Most importantly, as a research article by the Federal Reserve Bank of St. Louis recently stated, inverted yield curves don’t cause recessions, but they do signify a deceleration of growth, that when combined with a negative external shock can send the economy into a recession. We don’t know what the shock will be this time around, but when conditions of slower economic growth grow more widespread, we have to take notice and prepare.

Our first yellow indicator deserves attention, but it does not have much significance on its own. As a reminder, green signifies a positive indicator, yellow signifies some weakness in the data, and red signifies extreme caution over the current readings. While yellow doesn’t feel good, it does not rise to a high level of concern. In fact, throughout any bull market and economic expansion we expect to see many yellows. Even a single red would not lead us to take action. The Allegiant Investment Research team is looking for three red indicators before making significant changes (i.e. a significant reduction in risk). Historically, three red indicators has been a really good predictor of an impending recession. It is at that point that we would reevaluate every portfolio and, in many instances, dial back the risk, as long as that is also the prudent investment decision for the individual objective. (Side note: this is not meant to pick the absolute top of the market. Instead, it is designed to sidestep some of the severe declines associated with recession-based bear markets, which are usually the most severe.) As investors we accept the volatility of confidence-based market declines, but we try to limit (not eliminate) the severity of losses during recession-based declines. For now though, the data does not lead us to make any major changes. The best advice is to stay the course until the data changes.

Benjamin W. Jones, CFP®, AIF®CERTIFIED FINANCIAL PLANNER ™Chief Investment Officer, Principal

ISM ServiceJob Openings

Consumer Confidence Y-o-Y Change

10-Year/3-Month Treasury Spread

S&P 500 & 20-Month Moving Average

Leading Index

Positive Indicator Negative IndicatorWarning Indicator

December 2018

Table of Contents

Economy6) U-3 & U-6 Unemployment7) Labor Force Participation Rate8) Long-Term & Short-Term

Unemployment9) Nonfarm Payrolls10) Job Openings11) Employment Statistics12) Global GDP13) U.S. Trade Statistics14) U.S. Manufacturing PMI 15) Foreign Manufacturing PMI16) U.S. Services PMI17) Foreign Services PMI18) Economic Activity19) Housing Supply & Demand20) Housing Prices21) Household Finances22) Consumer Default Rates23) Consumer Spending & Saving24) Consumer Confidence25) Consumer Confidence Y-o-Y26) Federal Government Finances27) Yield Curve Spread

Equities29) Corporate Profits30) S&P 500 & 20-month Moving

Average31) S&P 500 Earnings Yield & Baa

Bond Yield32) Corporate Finances33) Global Earnings34) Domestic Valuations35) Foreign Valuations36) Sector Valuations37) Sector Valuations38) Sector Valuations39) Sector Valuations

Fixed Income41) Consumer Prices42) Producer Prices43) M2 Money Supply & Velocity44) Global Central Bank Policy45) 10-Year Treasury Yield46) Global 10-Year Yields47) I/G Corporate Bond Spreads48) High Yield Spread49) Muni/Treasury Ratio50) State and Local Debt51) Emerging Market Bond Spread52) Mortgage Delinquency Rates

Commodities54) Energy55) Industrial & Precious Metals56) Agriculture57) Foreign Exchange

Economy

U-6 & U-3 UnemploymentM

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Economy

6

U-3 Unemployment & Participation RateM

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Economy

7

Long-Term & Short-Term UnemploymentM

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Economy

8

Nonfarm PayrollsM

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Economy

9

Job OpeningsM

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Economy

10

Employment StatisticsM

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Economy

11

Wage Growth Employment Cost Index

Average Weekly Hours Worked Total U.S. Productivity

Global GDP GrowthM

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Economy

12

U.S. Trade StatisticsM

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Economy

13

U.S. Current Account Import/Export Growth Y-o-Y

Import/Export PricesImport Prices ex-Petroleum

U.S. Manufacturing PMIM

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Economy

14

Foreign Manufacturing PMIM

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Economy

15

Euro Zone China

Japan UK

U.S. Services PMIM

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Economy

16

Foreign Services PMIM

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Economy

17

Euro Zone China

Japan UK

Economic ActivityM

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Economy

18

Light Vehicle Sales Durable Goods Orders

Industrial Production Capacity Utilization

Housing Supply & DemandM

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Economy

19

Housing Starts & NAHB Index Existing Home Inventories

Housing Supply in Months Homeownership Rate

Housing PricesM

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Economy

20

Homebuyer Affordability

Case-Shiller 20-City Home Price Index

Household FinancesM

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Economy

21

Household Debt Service Ratio

Household Debt Y-o-Y Growth

Household Net Worth

Household Net Worth Y-o-Y Growth

Consumer Default RatesM

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Economy

22

Consumer Spending & SavingM

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Economy

23

Retail Sales

Personal Income & Spending

Savings Rate

Energy Expenditures a % of PCE

Consumer ConfidenceM

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Economy

24

Consumer Confidence Y-o-Y ChangeM

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Economy

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Federal Government FinancesM

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Economy

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Federal Budget Surplus/Deficit

Total Public Debt to GDP

Federal Debt Average Maturity

10-year/3-month Treasury SpreadM

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Economy

27

Equities

U.S. Corporate ProfitsM

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Equities

29

S&P 500 & 20-Month Moving AverageM

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Equities

30

S&P 500 Earnings Yield & Baa Bond YieldM

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Equities

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Corporate FinancesM

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Equities

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S&P 500 Operating MarginS&P 500 Debt/Equity

S&P 500 Current Assets/Total Assets S&P 500 Dividend Payout Ratio

Global EarningsM

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Equities

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Domestic ValuationsM

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Equities

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Foreign ValuationsM

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Equities

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Sector ValuationsM

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Equities

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Health Care Consumer Staples

Utilities

Sector ValuationsM

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Equities

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Consumer Discretionary Technology

Financials

Sector ValuationsM

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Equities

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Energy Materials

Industrials

Sector ValuationsM

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Equities

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MLP REIT

Fixed Income

Consumer PricesM

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Fixed Income

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Producer PricesM

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Fixed Income

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M2 Money Supply & VelocityM

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Fixed Income

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Global Central Bank PolicyM

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Fixed Income

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Fed Funds Rate

Bank of England Rate Japan Overnight Rate

European Reference Rate

10-year Treasury YieldM

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Fixed Income

45

Global 10-year Government Bond YieldsM

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Fixed Income

46

Investment Grade Corporate Bond SpreadsM

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Fixed Income

47

High Yield Bond SpreadM

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Fixed Income

48

10-year AAA Muni/Treasury RatioM

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Fixed Income

49

State & Local Debt Y-o-Y GrowthM

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Fixed Income

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Emerging Markets Bond Yield SpreadM

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Fixed Income

51

Mortgage Delinquency RatesM

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Fixed Income

52

Commodities

EnergyM

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Commodities

54

WTI Crude Oil Natural Gas

Heating Oil Coal

Industrial & Precious MetalsM

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Commodities

55

Gold Silver

Copper Aluminum

AgricultureM

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Commodities

56

Corn Wheat

Sugar Soy Beans

Foreign ExchangeM

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Commodities

57

Dollar Index Euro/Dollar

Dollar/Yen Pound/Dollar

Allegiant Private Advisors

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market

conditions based on the average performance of 500 widely held common stocks. The Russell 3000 is a market capitalization weighted equity index encompassing the 3,000 largest U.S. stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Emerging Markets Index is a float-adjusted market capitalization index that

consists of indices of 21 emerging economies. The CBOE Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The Shanghai Composite Index is a stock market index of all stock (A shares and B shares) that are traded at the Shanghai Stock Exchange. The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management. Investments involve risk

including possible loss of principal amount invested. Commodities investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.

Advisory services offered through Commonwealth Financial Network, A Registered Investment Adviser.

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