A turbulent fourth quarter for global equity markets capped off a year to forget for investors. We started the fourth quarter with the S&P 500 and Dow Jones Industrial Average just off their all-time highs. Unfortunately, October began with what would turn out to be a wild three months. We experienced our second stock market correction (decline of 10% from the all-time high) of the year and the first bear market (decline of 20% from all-time high) since 2011. There was a wave of panic selling in the final month of the year, which had started out with a decent chance of being another year of overall annual gains for US equities, but ended in disappointment.

Looking back, it was a strange investment year in many respects. First, the markets endured two major beatings—from late January to early February (does anyone remember that one?), and again from early October and especially through December. As the media so much enjoyed repeating, the S&P 500 index registered the worst December performance since 1931. This was the first time since 1948 that the S&P 500 index rose in the first three quarters and then finished the year in the red.

The declines weren’t just limited to the S&P 500. The S&P 500 index was the best-performing equity asset class in 2018, finishing down only 6% for the year. US small company stocks, measured by the Russell 2000 Small Cap Index, began the year off to a strong start, only to stumble in the final quarter losing nearly 20%, to end the year with a negative 11% return. The pain was even greater for international investors. Overall, the broad-based EAFE index of companies in developed foreign economies lost 13% in the final quarter and ended the year down 16%.

There were two lone bright spots during the fourth quarter: gold and bonds. Investors tend to view these assets as safer investments and pile into them when stock prices are falling, which helps provide a counterbalance in a diversified portfolio. Gold finished the quarter up 7.5%. The bond market, measured by the Barclays Aggregate Index, was up 1.6% in the fourth quarter, erasing losses from earlier in the year, caused by rising interest rates, to finish essentially flat for the year.

If you look at the chart below, which shows returns for the last three years for nine different investment classes, you can see that 2016 and 2017 were extraordinary years; everything went up (as shown in green). 2018 was also extraordinary—in the opposite direction; everything except cash was in the red.

Basically, if you were an investor, you lost money last year. But that also, of course, provided us and continues to give us the opportunity to buy investments at discounted prices. We are always looking for opportunities to add to your investments when we consider them on sale.

That was last year. Where does this leave us in the year ahead? With the government shutdown, trade wars/tariffs, political uncertainty and the ever-looming possibility of a recession, investors are understandably nervous about the near-term future. The equity markets are reflecting that nervousness through depressed prices.

However, it’s not all doom and gloom. By all measures, the US economy is still growing. GDP growth is expected to come in at about 3%, unemployment is at its lowest levels in nearly 50 years, corporate earnings are strong, and consumer confidence remains high. These are hardly signs of grave times ahead for the US economy.

There’s still the lingering trade dispute with China. This has the potential to continue to weigh on stock prices. We’ve heard on many occasions over the past year that progress was being made in talks between the two countries, only to see those hopes quickly fade. The uncertainty around the US-China trade talks is a risk, but it can quickly turn into a positive for investors. If President Trump and China’s President Xi can come to an agreement on trade, that could be wildly positive for stocks, particularly those investments that have suffered the most as a result of the trade dispute—emerging market stocks.

After months like December, investors can often catastrophize over every little thing. They default to assuming the worst will occur. This can cause panic-selling which would lead to steep declines like we saw in the fourth quarter. The silver-lining in all of this is the fact that we can now buy many kinds of investments at cheaper prices than we could just three short months ago. It’s not much, but it’s something to feel good about.

Nobody can predict whether the markets will recover in 2019 or experience a steeper decline. All we know is that, historically, all market declines have been temporary phenomena, and those investors who rebalance their portfolios—buying stocks when their percentages of the total have gone down—tend to do better than investors who don’t, and especially better than those who lose their nerve and sold in a panic during the downturn.

As always, if we can answer any additional questions about your portfolio or the latest financial news, please be in touch.


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