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STA Weekly Report – Market Regains Confidence But Fundamentals Disagree

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Market Regains Confidence But Fundamentals Disagree
Are You Riding the Stock Market “Roller Coaster”?
401k Plan Manager*Updated on 12/31/2018

Global equity markets certainly started 2019 in risk-on mode, encouraged by a dovish Federal Reserve and progress on the trade front.

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US stocks have delivered double digit returns while the rest of the world is in mid- to high- single digit territory. In fixed income, high yield bonds and emerging market debt took the lead while safe heaven Treasury bonds lagged.

Source: Bloomberg
Source: Bloomberg

Although we argued that the sharp selloff was overdone in December, we are now more cautious on how quickly the market bounced back, because while the market regained confidence the fundamentals failed to follow.

The deceleration of global growth continues. While we see signs of stabilization in the Chinese economy, the turmoil in UK has only deepened as the Brexit divorce deal stalled. The United States was the only bright spot in the first half of 2018, fueled by tax cuts and fiscal spending. However, it now joins the world as it cools from the peak growth. No country is on an island when global economy becomes increasingly integrated.

Source: Bloomberg

Major world economies, including the United States, Europe, China, and Emerging Markets, are all in deep negative territory on Citi’s economic surprise indexes, suggesting economic data are weak relative to the consensus forecasts of market economists.

Source: Bloomberg

CEO’s of large US corporations and owners of small businesses also appear less confident about future business conditions.

Source: Bloomberg

The Atlanta Fed’s closely watched GDPNow model forecasts real GDP growth at merely 0.2 percent for the first quarter, down from 0.5 percent on March 8. If it were an actual reading, this would represent a sharp deceleration from 2.6 percent growth in the fourth quarter of 2018.

Research beginning in the late 1980s documents that the slope of the yield curve is typically a reliable predictor of future recession. Based on this empirical evidence, the New York Fed’s recession model sees a 24.6% of probability of U.S. recession in the next 12 months. The odds have risen sharply in recent months. Historically, readings above 25% correctly predicted the last 6 of  8 recessions with the exceptions being two false signals in the late 60s and late 90s.      

Source: Bloomberg

Chinese stocks led the recent recovery, outperforming major indexes in developed and developing markets. Besides potential trade agreement, the market rally was tied to the record surge in China’s credit impulse. Given the need to balance growth targets and financial leverage, it is unlikely we see this level of stimulus repeat itself in the near term.

Source: Bloomberg

Global stocks looked significantly undervalued at the very beginning of 2019. However, after the recent rally, they look less appealing from valuation perspective.

Source: Bloomberg

Technical signals also seem to indicate a less favorable situation than we had to start the year with the Relative strength index (RSI), suggesting that global stocks were “overbought” in February.

Source: Bloomberg

Our investment process follows a three-pillar approach that combines research in macroeconomics, fundamentals & valuations, and technicals. Weakening fundamentals, rising valuations, and overheating technicals all argue against a further rally in the short-term. Therefore, we are not too surprised by the markets pullback last week. While not bearish, we remain cautious and guarded and encourage our readers to stick to a well-defined investment discipline and risk management process, rather than following “gut feelings” that could lead to return-chasing behavior. 

Weekly Global Asset Class Performance

If you have any questions, please feel free to email me at


STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer

Mike Smith, President

Andrei Costas, Senior Investment Analyst (Equity Strategies)

Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

Are You Riding the Stock Market “Roller Coaster”?
Written By: Scott Bishop, MBA, CPA/PFS, CFP®

Over the past few years, I have been writing articles on coordinating your investment discipline with your overall Financial Plan.  Some of my recent articles talk about “Stress Testing” your portfolio and better aligning your overall portfolio allocation with your Financial Plan.

Over the past year, I have been called by MANY journalists asking for some of my opinions on the markets and how to help clients deal with this volatility.  At STA Wealth, many of these articles are listed in our “In the News” section of our website.  I also publish many of these on my twitter account @STAWealthAdv – please follow me to continue to see my thoughts.  Also, if you are concerned about the markets, please call us so we can help you make prudent investment decisions aligned with your personal goals and objectives.

Top 20 STA “In The News” on Market Volatility and Planning Ideas:

  1. Wall Street Journal – Retiring soon? Planning for market downturns.
  2. Houston CPA Society Forum – How to stay sane in crazy markets
  3. GoBanking Rates – Fear that you will never retire?
  4. US News – Differences between tactical and strategic asset allocation
  5. The Street – Can you visualize Your retirement dreams?
  6. Investopedia – Do you have the right financial advisor?
  7. Forbes – Dealing with volatile markets
  8. Horsesmouth – How much “Advisor Alpha” are you getting from your advisor?
  9. Pursuit of Happiness Radio – Investing in high volatility (radio interview on KTRH)
  10. Financial Planning Association – Seven developments that may impact your finances
  11. Forbes – Six tips for managing financial risks in middle age
  12. Magnify Money – How to prepare for the next recession
  13. Forbes – Eight factors for business owners to consider before retiring
  14. CNBC – Worried about IRA fraudsters stealing your money (self-directed IRA scams)
  15. FPA – The power of Financial Planning Part 2
  16. FPA – The power of Financial Planning Part 4
  17. InsuranceNews – Investors comfortable yet terrified of risk
  18. Advisor News – How advisors can prepare for a bear market
  19. Investment News – How financial advisors are dealing with market tumble
  20. Reuters – Got Cash? What to do with it right now

Important Disclosure:
Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC (“STA”), or any non-investment related content, made reference to directly or indirectly in this article / newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article / newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA is neither a law firm nor a certified public accounting firm and no portion of the article / newsletter content should be construed as legal or accounting advice.  A copy of the STA’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a STA client, please remember to contact STA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. STA shall continue to rely on the accuracy of information that you have provided.


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