USFC December 2018 CIO Report

US Freedom Capital
Investment Outlook
December 2018

VOLATILITY RETURNS TO THE EQUITY MARKETS

Volatility brought the US S&P 500 Index its best week in seven years, when the index rose 4.8% during the week of Nov. 26. Not long after—the week of Dec. 17—the S&P had its worst five trading- session period in over seven years, falling 7.1%.

The S&P’s biggest single-day point gain ever came on Dec. 26, up 117 points, or 5%. That more than made up for the nightmare before Christmas, a half-day trading session on Dec. 24, in which the S&P 500 fell 2.7%.

However, for the last week of 2018, the Dow rose 2.8%, the S&P 500 climbed 2.9%, while the Nasdaq registered a weekly gain of 4%, with all three indexes marking their first weekly gains after three straight weekly declines. Despite the upbeat moves, the indexes are all poised for annual losses for the first time since 2008, with Dow and S&P 500 on pace for their worst December since 1931, according to Dow Jones Market Data.

The market's swing come against a backdrop of anxieties about the global economy, Federal Reserve interest-rate increases and trade-war jitters that have undercut investors' confidence. In addition, a partial government shutdown continues into 2019, as President Trump fights to secure finance for a US-Mexico border wall: a demand that has been a sticking point in negotiations for an extension of government financing.

In summary, we are reminded that the inherent risk of volatility is the price one pays for liquidity. The Volatility Index (VIX), which is also a measure of risk, remained at historic lows for the majority of the summer, promoting a false sense of security during a rising market.

MACROECONOMIC NEWS

UNITED STATES ECONOMY: The US economy has now expanded for 112 consecutive months, the second-longest stretch on record, and per the US Federal Reserve Bank, recent data point to continued growth due to strong consumer spending, robust employment growth and elevated business and consumer confidence. The unemployment rate remains at a historical low of 3.7 percent, and various inflation measures are at the Federal Reserve's 2 percent target.

TEXAS ECONOMY: The Texas economy continues to grow at a solid but slightly slower pace, with job growth broad based across industries and regions. The Austin, Houston and San Antonio metro areas led the state in job growth during the three months ending in November. The Texas Business Outlook Surveys indicate that growth in the manufacturing sector has moderated from the highs seen earlier in the year. Wage pressures have eased somewhat in recent months as well but remain elevated. The Texas labor market will likely tighten further in the months ahead; however, if oil prices continue to linger around $50 per barrel, job growth in the state may begin to decelerate. Texas exports are also likely to weaken due to lower energy prices.

OUR ECONOMIC OUTLOOK

This past month’s activity reaffirms our outlook for the economy. The Trump tax cuts of 2017 have had a positive effect on the economy, further extending the business cycle. We are adjusting our call to delay for a further quarter:

INVESTMENT OUTLOOK

We see US real estate continuing as a superior investment for our offshore investors, as this asset class is an incoming producing hedge against inflation and a hedge against the increasing volatility of the equities markets. Texas will continue to benefit from the fallout from the 2017 Tax Act, as companies in high tax states are faced with significantly higher local taxes in 2018 and beyond and many make the choice to relocate to states with low or zero state income taxes.

At the heart of Texas real estate performance is solid net migration; a trend which has continued for the past decade.

Net Migration to Dallas/Fort Worth

The Dallas/Fort Worth Metroplex at a Glance

• Dallas’ prominence arose from its importance as a center for the oil and cotton industries and its location along numerous railroad lines.
• Today, Dallas serves as the business and financial services center for the state and has evolved into a major high-tech hub.
• Dallas has become a popular migrant destination, attracting residents from abroad as well as from other states.
• The metro’s finance, insurance and transportation sectors are expected to see continued expansion following an earlier national consolidation that increased the sectors’ local concentration.

Our best wishes for your health and prosperity in 2019!

US FREEDOM CAPITAL

David E. Gunderson
Chief Investment Officer