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Monthly Market Insights - December

Despite a rocky ride for most of the month, most U.S. markets rebounded in November with the Dow Jones Industrial Average up 2.0%, the S&P 500 gaining 1.9%, and the small-cap Russell 2000 index up 1.7%. The NASDAQ 100 lost slightly, down 0.3%

Developed market foreign stocks gained a tepid 0.5%, while emerging markets surged 4.9%.

Uncertainty continues to reign

Pundits cited two catalysts for a sharp bounce off a retest of recent lows: a less forceful Fed and optimism that trade tensions might fade. That said, uncertainty continues to reign even as investors hold out hope that a year-end rally can boost returns and bolster confidence.

Why are interest rates and trade a concern?

Interest rates remain low, inflation tame, economic growth strong, and jobs plentiful, so why worry about interest rate normalization and trade tensions at all?

When it comes to interest rates, ultra-low rates had compelled savers to take risks in order to earn a decent return. As time passed, low rates also boosted housing affordability and increased home and auto prices and overall sales volume. Stock market valuations also surged, and U.S. stocks stayed in favor, given their strong earnings growth and the relatively weak performance from other asset classes.

But as interest rates rise, even just a little, cash has begun to yield almost as much as bonds. Home and auto sales and prices have weakened. And the ability for companies to maintain high profit margins has come into question.

Trade tensions have put additional pressure on global growth expectations and that’s been particularly hard on emerging markets. At some point, this pressure may lead to new investment opportunities, but our ranks currently keep us invested in the U.S.

A re-pricing of risk can be painful for investors, but it is normal. In fact, one reason the Fed raises interest rates is to promote thoughtful allocation of capital and keep speculation in check. For Upgraders, the result is greater diversification in our portfolios, and a reminder that asset allocation and risk management are critical parts of our long-term investment plans.

The end of the year is a good time to review your plans and make any necessary changes. This is also the time to make tax-savvy trades, decide how you’ll manage year-end mutual fund distributions, and consider smart ways to give to charitable organizations or family members.