So far, the opening weeks of 2019 in the markets are nearly a mirror image of the last two months of 2018. Last year, U.S. stocks fell sharply to end the year. This year, they have risen relentlessly and notched their best two-month start to a year since 1991. The S&P 500 currently sits at the same level as in early October, up 11% year-to-date and only about 5% off its all-time highs reached in September. After climbing steadily in each week of January and February, U.S. stocks finally took a breather last week to post their first negative week of 2019.
Late-Year Tensions Soured Markets in 2018
The market sell-off in the last quarter of 2018 was unusual in that it came during a time of considerable economic strength. In 2018, the U.S. economy enjoyed one of its best years in a decade with a robust jobs market supporting strong consumer spending. Business investment was also substantial as the year closed, rising 6.2% in the fourth quarter. Overall, the U.S. economy expanded at an annual rate of 2.6% during the quarter, a nice achievement given the backdrop of growing global trade tensions. If the economy continues to grow until July, this will be the longest expansion in U.S. history. Despite the good news on the economic front late last year, however, investors fretted over three issues as the year ended: the Fed raising rates too quickly, a damaging federal government shutdown and the ongoing trade tensions with China.
2019 Starts with Worries Easing
Now, at the middle of March, two of those three concerns have been put to rest, at least for the moment. The Fed has decided to become more “patient” with raising rates and the government shutdown is over. The last issue, the China trade war, also seems to be nearing an end as it appears the two sides are closing in on an agreement. What the nitty-gritty of the eventual agreement is probably won’t matter too much to investors in the short run. They will simply be happy to take the risk of a major trade war with China off the table for 2019.
Market Teaches Lesson of Patience and Persistence (Again)
The volatility in the market over the last five months from its highs in September to its lows in December, the S&P 500 fell 19.8%, just escaping the common definition for a bear market (a 20% drop from the highs). For investors, the volatility was certainly unnerving and provided a great opportunity to make mistakes in their portfolios. It also provided a lesson: volatility can come without warning or even good justification, and the investor’s best weapons to combat it are resolve and time.