THE WEEK AHEAD

Volatility picked up again last week as the Dow Jones Industrial Average fell by more than 3% on Wednesday alone. For the week, the Dow was down 4%, having bounced back from an intra-week drop of almost 6%. Wednesday’s drop marked the second day this year where the Dow fell by more than 3%. Sharp declines have become more common compared to past decades. Daily drops of 3% or more in the Dow occurred only twice during all of the 1960s; five times during the 1970s; fifteen times during the 1980s; and ten times during the 1990s. There were forty-three declines of 3% or more between 2000 and 2010. Since 2010, we’ve seen 15 such declines.

The Debt – Volatility Link

One possible reason for the increased volatility is the addition of more debt to the financial system. This is seen as the rise in total debt outstanding relative to output (chart, below) and a declining number of AAA rated issuers. Back in 1980, there were more than sixty AAA-rated corporate issuers in the United States. Today, that number has fallen to two. A downturn in the economy and asset values, coupled with more debt in the system, tends to amplify losses to stockholders. Consequently, we believe it is very important to have a sharp focus on quality companies in the context of a well-balanced portfolio.

2018 — A Transition Year

2018 is setting up to be a year of transition for markets following two strong years in 2016 and 2017. After a period of weakness in 2014-2015, we saw 2016 and 2017 as years of re-acceleration. Global economies rebounded, profits rose, and stock markets advanced. Tax cuts helped the domestic outlook in 2017, but other countries’ fortunes appear to have dimmed. Emerging economies are struggling with a credit overhang; Europe is contending with Brexit and a rising tide of populism; and China’s drive for growth is complicated by a trade skirmish with the United States.

On the positive side, we are happy to see that domestic credit markets continue to perform relatively well despite some hiccup in risk appetite, and most domestic leading indicators are still flashing positive signs at this point. We still see the United States economy as having relatively strong fundamental momentum and remains an attractive destination for global capital.

Looking Ahead

Next week we will update our WCA Fundamental Conditions index which will capture some of the changes we are seeing in the data flow. As it stands, the global picture has become more clouded as trade and other issues hang over markets. The recent pickup in volatility, and continued weakness overseas, likely will remain a drag on the near-term view.

For now, we remain with our key tactical calls which are summarized in our latest Q4 Tactical Asset Allocation quarterly report.

Kevin Caron, CFA, Senior Portfolio Manager
Chad Morganlander, Senior Portfolio Manager
Matthew Battipaglia, Portfolio Manager
Suzanne Ashley, Analyst
973-549-4168

www.washingtoncrossingadvisors.com
www.stifel.com

Disclosures
WCA Fundamental Conditions Barometer Description: We regularly assess changes in fundamental conditions to help guide near-term asset allocation decisions. The analysis incorporates approximately 30 forward-looking indicators in categories ranging from Credit and Capital Markets to U.S. Economic Conditions and Foreign Conditions. From each category of data, we create three diffusion-style sub-indices that measure the trends in the underlying data. Sustained improvement that is spread across a wide variety of observations will produce index readings above 50 (potentially favoring stocks), while readings below 50 would indicate potential deterioration (potentially favoring bonds). The WCA Fundamental Conditions Index combines the three underlying categories into a single summary measure. This measure can be thought of as a “barometer” for changes in fundamental conditions.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher-quality bonds. The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks, among other factors to varying degrees. Fixed Income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks, among other factors to varying degrees.

This commentary often expresses opinions about the direction of market, investment sector and other trends. The opinions should not be considered predictions of future results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete.

The securities discussed in this material were selected due to recent changes in the strategies. This selection criteria is not based on any measurement of performance of the underlying security.

Washington Crossing Advisors LLC is a wholly owned subsidiary and affiliated SEC Registered Investment Adviser of Stifel Financial Corp (NYSE: SF).