January 2019

November 15, 2019

At this time of the year we tend to reflect on the year past and wonder what the prospects are for the year ahead. At Pearson Financial Services, 2018 saw continued growth of our business, enhanced by many referrals from our existing clients. The main criteria we apply to all existing and new prospective clients, regardless of their net worth, is if we can help them reduce their costs, understand their risk exposure and manage their cash flow in the most tax efficient manner. Please feel free to give our contact information to anyone you think might benefit from our help!

We hope that our business model continues to be a source of confidence and support to you in an ever increasing climate of uncertainty. With that in mind, it’s important that you fill-out (as best you can) the enclosed Financial Fact Finder Update and return it to us promptly in the enclosed envelope. This information is critical for us to be able to effectively evaluate your overall financial planning objectives.

It’s also appropriate at this time to look a little closer at the stock market of 2018, which hopefully will give us a bit of guidance on what to expect in 2019. (Please see Attachment “Navigating a Downhill Climb with Normal Bouts of Volatility”). Volatility has certainly returned to the stock market after a strong start in January. February greeted us with the first of 2 corrections that occurred in 2018, with the 2nd occurring in October. The second deeper correction, that started in October, brought us to the brink of a Bear market, as represented by a downturn of 20% from the peak. It’s interesting to note that in in the last 40 years, 6 of the 10 Bear markets experienced led to a Recession.

The question on everyone’s mind is when will the next Recession be upon us! It’s clear that while the US economy remains somewhat strong, we are seeing signs of things starting to slow down. The GDP appears to have peaked in Q2 of 2018, business investment has started to slow, and housing values declined for the third straight quarter.

The ongoing trade war with China looks to continue to add angst to the market and business investment plans, all at a time when growth internationally generally appears to be cooling as well. Put it all together with the turmoil in Washington, all signs point toward a cautious year for investors, as one should expect modest returns in the stock market.

Jim Paulson, Chief Investment Strategist of the Leuthold Group, summed it up well when he said the issues confronting stocks are numerous and most likely will remain problematic for the balance of this expansion. Consequently, resolving these problems will not be easy. Could this Bull market have one more decent run left? Ultimately, it will be resolved with either a Bear market or a Recession.

The problem with a prediction for next year is based around too many unknowns. What if the Mueller investigation takes a turn the market is not expecting? What if trade tensions continue to grow? What if the Federal Reserve raises rates too far too quickly? On the other side of the coin, what if we get a deal with China where both sides are happy with the outcome? What if the Mueller investigation comes to a close and nothing further damaging comes out? What if the Federal Reserve is able to strike the right balance adjusting interest rates? As you can imagine, the outcomes to these questions will most likely have significant ramifications on the stock market.

It’s more important now than in recent past years that you are comfortable with your allocation to stocks, as volatility may continue for some time. Most of you are experienced investors, having been through many market pullbacks and recoveries over the years. For a bit of perspective on down markets, please see the attached chart that outlines the split between up and down time periods for the S&P 500 Index. Down markets and increased volatility is unfortunately part of investing and market timing is not a strategy we recommend. Yet, being comfortable with your overall balance of equities is key to long term success. Having a sufficient amount of cash and fixed income to weather a downturn is paramount to never being forced to sell equities when they are down.

Interest rates have started to creep up, especially on the short end of the curve. Although, as I finish this letter, the long term interest rates are moving back down a bit with the increased stock market volatility. The Federal Reserve increased rates for the fourth time this year on December 19th. While we may be far closer to neutral on rates, it appears the Federal Reserve will have to take a more cautious approach to increasing rates in 2019. A Federal Reserve forecast of 2 rate increases for 2019 seems a bit of a stretch with many market watchers and economists. Now, fixed income alternatives are able to earn a better interest rate than we had a few years back. CD’s and T-Bills are a nice option, without risk, since CD’s are FDIC insured and T-bills are backed by the full faith and credit of the US Government.

As we enter the Tax Season, it’s important to make sure that you have all the necessary information and forms to have your taxes completed promptly. From time to time, for various reasons, we see that cost basis information is not always reported on a tax form. Or, if you have made donations to charities directly from your IRA – please make sure to note that to your accountant, as the 1099R Tax Form for the IRA will not show your QCD’s (Qualified Charitable Distributions) so you are responsible for providing that information to your accountant.

As always, please do not hesitate to call us with any questions you have or for any help that you may need. Also, remember to set aside a time in the New Year when we can conduct an annual review on all of your accounts together, either in person or on the phone.

Wishing all of you a very Happy and Healthy New Year.


Bryan W. Bastoni, CFP