Well 2018 is officially in the record books! It came in like a lamb and left like a lion as they say. We saw some crazy things in the markets including one of the worst single point drop days in the Dow Jones history. Only to be followed by our first 1,000 point up day as a late holiday gift. We also experienced our first bear market (classified as down 20% from the peak) since the financial crisis in 2009. That said, like every year, there were big stories and smaller ones that framed the market performance.
First, let’s review what the year looked like in the markets.
There weren’t many bright spots in the markets from a rate of return. Domestic large cap stocks were down over 4%, while growth stocks (down approx. 1.5%) outperformed value stocks (down over 8%). It was a worse year for international equities. The developed international (think U.K., Germany, France, Japan) index was down over 13% while emerging markets were down over 14%. If we turn to the domestic bond market, it was virtually flat for the year (although this is a much harder market to quantify).
Why the bad year?
The big question looming is why the negative year in the markets? For starters, it is important to note that this is normal market behavior. If anything, we’ve been long overdue for some market volatility. It’s been nearly a decade since we’ve had a rough calendar year like 2018. Historically we tend to see one every 3-4 years or so. Take comfort in knowing this is simply what the markets do. The primary theme of 2018 was uncertainty. Possibly the largest uncertainty was what had (and is still around today) been occurring with our largest trading partners. It took some time for a new deal to solidify with our North American allies, and our negotiations with China continue today. Will we start a trade war and major embargoes or come to some amenable solution? The jury is still out, and we anticipate will have some resolution in the coming weeks. The other big uncertainty was the action of the Federal Reserve. Throughout 2018, interest rates were increased on four separate occasions to bring rates up to a more “normal” level. By the end of the year, investors became spooked by rhetoric that this contractionary monetary policy will continue in 2019. Lastly, there is also some concern of a softening economy and real estate market.
Not all bad news!
While those are very valid concerns, there are plenty of positive themes in the global economy. These helped to lift equity markets to high levels through the first three quarters of the year. Our GDP was one of the strongest in years growing at 3.5% for the third quarter. The unemployment rate is down below a healthy 4%, which is considered full employment. Additionally, it’s important to remember that the Federal Reserve is being more aggressive with raising rates. They are doing so as they believe the economy is at a point where it can sustain higher levels. This suggests that we no longer need assistance by artificially keeping interest rates down.
What to do now?
Based on the returns listed above, you’ll have likely experienced a negative type of return for 2018 in a diversified portfolio. It is always important to remember that staying diversified and sticking to a plan tends to be the greatest weapon in our arsenal. When people overreact is where we find permanent mistakes are made. It is during times like these that investors need to review their situation with their planner. This helps to ensure that both expectations and portfolios are aligned moving forward. When looked at in context, take 2018 for what it is, a temporary down turn that is healthy for an economy. I’ll leave you with a quote from one of my favorite financial minds Nick Murray. “A bear market is an episode during which common stocks are returned to their rightful owners.” Here is to a great 2019 and always remember, we are here for you through good times and bad.