In 2018, nearly all major asset classes lost value.  Overall, it was the worst year for investors since 2008. U.S. stocks managed to ignore the deteriorating returns in bonds, commodities and overseas markets for the first three quarters of the year, then finally gave in during the fourth quarter. A toxic cocktail of negative macro concerns late in the year hit the markets hard, sending the S&P 500 Index down by 14% in the fourth quarter.  December, in which the U.S. market plunged 8%, was the worst December since 1931.

Though U.S. stocks performed poorly in 2018, they fared better than international equities and commodities.

Returns in 2018

Dow Jones Industrial Average -5.6%

S&P 500 Index                                                   -6.2%

Europe (Stoxx 600)                                         -13.2%

MSCI Emerging Markets Index                       -14.5%

China (Shanghai Comp)                                  -24.6%

Japan (Nikkei 225)                                          -12.1%

Commodities (Bloomberg Commodity)         -11.3%

U.S. Bonds (Barclay’s Aggregate)                     -0.2%

Sharp declines like the one we experienced last quarter are of course unpleasant and unpredictable. However, but they are occasional but regular features of markets.  Individuals investing over a multi-decade horizon should be very reluctant to alter their financial plans due to such episodes of volatility.  As with the weather, occasional squalls in markets come and go.

Patient Federal Reserve

The new year has started off with a much-improved tone for investors, with U.S. equities bouncing strongly since late December and registering mid-single digit returns just two weeks into the new year. Perhaps more than any other factor, Fed Chairman Jerome Powell’s utterance that the Fed could afford to be “patient” with regard to interest rate increases seems to have appeased investors who, just a month ago, thought the Fed was not heeding market volatility closely enough and ignoring signs of slowing global economic growth.

Robust Earnings

The December plunge occurred during something of an information vacuum, with companies not saying much while investors keyed off several negative macro factors, such as an unaccommodating Fed, the resignation of Defense Secretary Mattis, and lack of progress on China trade talks. We are now into the 4^th quarter earnings season, however, and strong earnings reports (mostly) from large U.S. banks have given investors confidence that the economy remains quite strong despite a few signs of fatigue.

Strong Investor Sentiment

Even though we are now in the fifth week of the longest-ever shutdown of the federal government, investor sentiment has yet to be dampened. With the Fed now less likely to increase rates and seeming progress in trade talks with China, investors, heartened at the headway on these two matters that are so important to sentiment, have returned to put money to work.

With 2018’s stellar corporate earnings growth (up 20%) now in the past, investors are looking to the 2019 earnings trajectory to reprice stocks. A month ago, the Fed was a wet blanket for sentiment as investors feared it would ratchet up rates too quickly, curbing growth. China was also a headwind for sentiment in December, but now, with positive noises emanating from the trade talks, investors are turning more cautiously optimistic.  The government shutdown, if it persists much longer, is also likely to mute first quarter growth. As with past government shutdowns, however, investors as yet do not seem to have major concerns with the current impasse in Washington D.C.

How these three issues play out over the coming months will likely determine the near-term courses of both the bond and stock markets.

Please don’t hesitate to get in touch with me if you would like to discuss your portfolio or the markets.