LAST MONTH LAST 3 MONTHS YTD

S & P 500 Index -9.03% -13.52% -4.38% Russell Midcap Index -9.92% -15.37% -9.06% Russell 2000 Index -11.88% -20.20% -11.01% Dow Jones Industrial Average -8.59% -11.31% -3.48% Morgan Stanley EAFE Index -4.85% -12.54% -13.79% DJ US Real Estate Index -7.68% -5.97% -4.03% S&P Commodity Index -7.75% -22.94% -13.82% Barclays Aggregate Bond Index 1.84% 1.64% 0.01%

INDEX RETURNS

Our last newsletter discussed the third quarter growth performance and we stated that the outperformance “is reminiscent of the late 1990’s before the 2000 market correction.” So it was not entirely surprising to see the broad market sell-off that occurred over the final quarter. The S&P 500 dropped 13.52% in the final quarter to finish down 4.38% on the year after dividends. Small cap stocks, as measured by the Russell 2000, came under pressure declining 20.20% in the last three months of the year and finished down 11.01% on the year. Small cap growth stocks were down 21.6% in the last quarter vs. 18.6% for value. On the year, international stocks struggled with the MSCI EAFE Index declining 13.79% and the Emerging Markets Index dropping 14.58%. However, it is interesting to note that both fared better in the last quarter than domestic stocks. It will be interesting to see if this trend continues in 2019. The Barclays Aggregate Bond index recovered in the final quarter and finished the year basically flat at 0.01%.

ECONOMIC REVIEW AND OUTLOOK The U.S. economy grew at a 3.4% annualized rate in the third quarter following the 4.2% rate in the 2nd quarterof 2019. Early estimates for the fourth quarter are in the 2.0 – 2.5% range. Expectations are for the economy to slow in 2019. We think the risk of a recession in late 2019 or early 2020 is increasing with the Fed continuing the rate hike cycle. The Leading Economic Index increased in November by 0.2% to 111.8 following a 0.3% decline in October and a

First Quarter 2019

First Quarter 2019

0.6% increase in September. Industrial Production rose 0.6% in November after declining 0.2% in October. TheCapacity Utilization rate (which measures how much slack is in the economy) was at 78.5 percent in November which is still 1.3 percentage points below the long-term average. Non-farm payrolls increased by 312,000 in December, the unemployment rate increased to 3.9% and the number of unemployed increased by 276,000 to 6.3 million as more people started looking for jobs. In December, the labor force participation rate was at 63.1%. Initial weekly unemployment claims were 231,000 for the week ending December 29. According to the JOLTS survey, there were 7.1 million new job openings which is a new high for the series. This means there are more jobs available then there are unemployed Americans. Manufacturing decreased in December to 54.1% from 59.3% in November on the ISM PMI index. This marks the 116th consecutive month of expansion (any reading above 50 represents expansion). The ISM Non-Manufacturingindex was at 60.7% in November which marks the 106th consecutive month of expansion. The Business Activity Index was at 65.2% and the New Orders Index was at 62.5%. This data points towards some economic growth over the next few quarters, assuming no major trade disruptions. Global economies have started to cool. The JP Morgan Global PMI was at 51.5 in December. Any reading above 50 represents expansion, but this number has been coming down. The Euro Area is at 51.4 led by the UK at 54.2. Emerging economies had a December reading of 50.3 led by Taiwan at 53.2 and India at 52.6. This number continues to show expansion, but trade issues could impact this data in 2019.

EQUITY AND BOND MARKETS The last three months of the year brought renewed volatility and intense selling pressure. As of December 26, the S&P 500 was down more than 13% on the month and 18% for the quarter. Going back to 1946, when the S&P 500 dropped more than 10% in a month, the index posted average gains of 6% three months later and 17% a year later. In addition, it has been positive 90% of the time this has occurred. The recent selloff in equities has improved valuations. The S&P 500 is now trading at a P/E ratio of about 14.4 times earnings, while the long term average is closer to 16.1 times earnings. International stocks continue to look attractive as the Developed Markets are trading at a P/E ratio of about 13.5 times earnings, while its long term average is also 16.1. Emerging Markets also look cheap as they are trading at a Price-to-Book ratio of 1.5 versus the long-term average of 1.8.

First Quarter 2019

Cash was the best performing asset class in 2018 with a return of 1.8% followed by bonds which were breakeven on the year. Going back to 2004, cash has never been the best asset class. The closest it got was in 2008 when bonds were up 5.2% and cash was up 1.8% in second place. In 2008, emerging market stocks was the worst asset class. In 2018, emerging market stocks was once again the worst asset class. What will happen in 2019?Only time will tell, but it is important to note that in 2009 emerging markets recovered and became the best performing asset class for that year, up more than 70%. In fact, the same can be said for international developed stocks. In 2008, they were the second worst asset class, but rebounded in 2009, up more than 32%. In 2018, international developed stocks was the second worst asset class. Again, the 2019 story has yet to be written, but we feel confident that international equities will be an important contributor to the portfolio.

Volatility will persist in the first half of 2019. The Fed is expected to increase rates 1-2 more times this year, which will inherently slow economic activity. Meanwhile, trade discussions will continue to make the market nervous as 38% of U.S. company revenue comes from international sales. A disruption in this area will be tough for markets.

PORTFOLIO MANAGEMENT

For most of the year, diversified portfolios did not look great relative to just owning the S&P 500. We know that going back to 1950, international investments have outperformed U.S. stocks 50% of the time. So this 10 year run for U.S. outperformance is exceptional, but will ultimately come to an end. December may have been the beginning of the mean reversion that we have been awaiting. International stocks fared better in the December selloff and consequently, diversified portfolios held up quite well and essentially caught the S&P 500. Because valuations are cheaper for international stocks, they should hold up better in down markets…they are already cheap, so they don’t have as much room to fall. We are not quite out of the woods just yet. Lower valuations will help protect on the downside, but there are still risks. As the economy slows this year, we will begin comparing earnings to over-inflated 2018 levels from the tax cut. This will once again put pressure on stocks and volatility will persist. It will be important to stick with the diversified portfolio approach and ignore the short-term fluctuations. This approach is designed to smooth out the bumps and works over an extended period of time. We must be patient given where we are in this cycle.

FINANCIAL PLANNING

There are some important changes in 2019 that everyone should be aware of. We will cover a few of the key items in this section.

• The Tax Cuts and Jobs Act (TCJA) provides a new tax deduction on qualified business income (QBI) earned through pass through entities. If your QBI does not exceed $157,500, or $315,000 if you are married, you can deduct 20% of this income. If it is above these thresholds, phase-outs and limitations begin to apply.

• The standard deduction in 2019 is now $12,200 per person, plus an extra $1,300 if you are 65 or older. Married couples would get $24,400 plus an additional $2,600 if over age 65.

• The Health Savings Account contribution cap has been raised to $3,500 for individuals or $7,000 for account owners with a family. A $1,000 catch up contribution is allowed for those over age 55.

• Retirement account deferral limits have also increased. Limits for 401(k)s, 403(b)s, and 457 plans are now at $19,000 in 2019 with a $6,000 catch up contribution allowed for those over age 50.

• SIMPLE IRA contribution limits have increased to $13,000 per participant with a $3,000 catch up allowance for those over age 55.

• Traditional and Roth contribution limits have increased to $6,000 with a $1,000 catch up for those over 55.

Here are some smart phone apps that we think you might enjoy. Please let us know if you have any new apps that you would like to share with everyone.

• Google Keep: The Google Keep app is the “Post-It Note” for your phone/tablet. The app allows you to create “to do” lists, grocery lists, generate reminders, create voice memos and categorize them by color, label or name. It is efficient and effective. This is a free application.

• Runkeeper: The Runkeeper app is a GPS run tracker and training aid. It utilizes your phone’s GPS to be a digital personal trainer. Whether you are running, walking, or cycling, this is the app for your New Year’s resolution to work out more. The main app is free but for $10 per month you can gain access to premium training plans and customized workouts.

• Weather Pro: The Weather Pro app is designed for people who want a wealth of weather information. For any selected location, a single screen shows the current conditions, a local radar, upcoming predictions and a forecast for the entire week. This is a free application on most platforms.

Company News

Galecki Financial Management had an exciting 2018. We adopted families for Christmas, we continued an office Wellness Challenge, and we welcomed a new baby to the family.

GFM adopted three families from Whitington Homes and Services in Fort Wayne for Christmas this year. We split up into three teams and shopped and wrapped gifts for these families. Most of the gift requests were necessity items, such as socks, shirts, coats, etc. It is a humbling experience to do this together and allows us to be truly thankful for our many blessings, and to share these blessings with others in our community. This was the first year for the GFM Wellness Challenge. It is a challenge that we put together to make sure that our staff stays physically healthy. Employees must complete 360 minutes per month of exercise to qualify. We are pleased to report that 83% of our staff completed the challenge for every month in 2018! Chloe Blythe, and her husband Ryan welcomed a baby girl on December 5th, 2018. Olivia Blythe is home with Mom and Dad and is doing great. If you would like to congratulate Chloe and Ryan, you can email them at Chloe@galecki.com. - Galecki Financial Management Investment Committee Special Note: If you would like to schedule an appointment with a Certified Financial Planner™ Professional, please visit www.galecki.com.

First Quarter 2019