The fourth quarter (Q4) of 2018, and the year itself, was marked by volatility, rising anxiety for investors, and a shift in the market environment. It was a year that saw record highs for the stock market in January and the worst December since the Great Depression. Investors began the year feeling "bullish" but ended by expressing extremely low market sentiment.
The economy remained strong throughout the year, however, while a variety of headlines seemed to coalesce at times to rile the markets. Stocks have recovered from their lows somewhat, but anxiety remains high amid a myriad of risks.
Here's a summary of how major market indexes ended the quarter and the year, respectively:
• S&P 500: down 13.5% and down 6.2%
• Dow Jones: down 11.3% and down 6%
• Russell 2000 (small company stocks): down 20.3% and down 11.1%
• MSCI EAFE (foreign stocks): down 12.6% and down 13.8%
• MSCI EM (emerging markets): down 7.6% and down 15.3%
• U.S. Aggregate Bonds: up 1.9% and about flat for the year
• Municipal Bonds: up 2% and up about 1% for the year
Top performing sectors in 2018 included traditionally defensive areas like Healthcare, up about 6%, and Utilities, up about 4%. Poor performers included Energy, down about 18% as the price of oil fell 25%. Communication Services, a recently created sector containing some of the poorer-performing tech stocks this year, was down about 15% in Q4 alone.
Overseas, 2018 saw poor performance from China, down about 25%, and from emerging markets more broadly. Developed foreign markets were also down for the year. Economic powerhouse Germany was down 21%. Italy was down 14% and the U.K., on general weakness and continued Brexit concerns, was also down 14%.
The dramatic increase in volatility during Q4 and 2018 was due to a variety of concerns. Investors worried the Federal Reserve would raise interest rates too rapidly, that the trade war with China would escalate, that there was a recession on the immediate horizon, that the health of the banking system was suffering, that the White House would try to intervene in Fed policy, and, at the end of December, that there would be a government shutdown. Quite a list!
While each on its own is worrisome, individually these concerns might not have had as large an impact on the stock market. But taken together they really piled on to create some dramatic moves during December. The Dow Jones Industrial Average declined 400, 500, 600 points on numerous days, and almost 800 points early in the month. There were good days too. The day after Christmas the index closed up over 1,000 points after posting the worst-ever Christmas Eve loss. Talk about volatility!
Perhaps ironically, these wild price swings took place while the U.S. economy continued its nine-plus-year expansion. 2018 saw meaningful wage growth of about 3% for the typical American worker, near-record highs for consumer confidence, and very low unemployment of 3.7%. Near year-end the unemployment rate ticked up to 3.9% as more people entered the workforce – another good sign.
Because of this continued economic growth the Federal Reserve raised its short-term interest rate benchmark four times during 2018, or a total of 1%. The Fed has raised rates nine times in the past several years and the uncertain path for future increases continues to make bond and stock investors nervous.
The outlook for economic growth is currently solid but some analysts are warning that our next recession, while not necessarily on the imminent horizon, is still looming. Additionally, concerns about interest rates and increasing trade war rhetoric aren't likely to diminish anytime soon. Also, as of this writing we're still mired in a government shutdown with no meaningful solutions in sight.
As we look ahead, 2019 seems to be another year to focus on staying disciplined. There can and will be any number of negative headlines to contend with and this year could test us as much as last year. Instead of constantly reacting to the news, whether positive or negative, it's important to stick to your plan and trust that it will play out well over time. This, as always, will provide your best chance for success.
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