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2018 Market Perspectives

Thomas BalisJanuary 11, 2019

Investments

While for some things, it seems like time flies, 2018 surely did not feel that way for many investors. Indeed, most could not wait for the year (and the pain) to be over.  Gone were the days of 2017 where volatility stayed at historic lows, and all asset classes generated fantastic returns. 2018 proved to be the year where volatility came roaring back, and the stock market (re)became a roller coaster. 

US equities dropped after a strong January, recovered to set new highs by the end of September, and then plummeted once more in the fourth quarter on concerns regarding the Federal Reserve and US-China trade tensions. The S&P 500 (a broad measure of large company stock performance in the US) ended the year down over 6%. Within US equities, some areas fared better than others. On a relative basis, growth outperformed value, and large caps outperformed small caps. After leading the group for much of the year, small caps lost over 20% of their value in the fourth quarter as measured by the Russell 2000 Index, ending the year down 11%. Even Large Cap Growth, a perennial darling, lost 1.5% for the year. 

Across the pond, markets fared even worse. After returning 25% in 2017, the MSCI EAFE Index (measuring international developed markets) lost 14%. Moreover, after stunning returns of 37% in 2017, the MSCI EM Index (measuring emerging markets) lost 15%.  Clearly, for equity investors, 2018 proved to be a year with nowhere to hide.

Fixed income did, however, provide some shelter to investors. While modestly negative for much of the year, the Barclays US Aggregate Bond Index finished positive at year end. Cash actually fared a bit better, and International Fixed Income was the top performer, returning 3% (as measured by the Barclays Global Aggregate Hedged Index) for funds that hedged to the dollar. As of year-end, HFA no longer invests in any unhedged international fixed income funds.

The new tax law did provide fiscal stimulus to the US economy, spurring strong profit growth for most US companies. GDP grew 3.4% in the 3rd quarter, unemployment hit 3.9% at year end, and inflation stayed muted, all signs of a healthy economy, which coming into 2019 appears to be slowing, not stalling.  The Federal Reserve did raise interest rates 4 times, but appears to be willing to be patient in 2019. This leaves trade tensions, particularly between the US and China, as the central catalyst for markets in the near term. Overall, we remain cautiously and modestly optimistic for 2019.

The resurgence of market volatility has kindled fears of a return to 2008 for a few. When a recession does come (and it will sooner or later, as they always do), most economists predict something much milder, in line with historical norms, rather than the excessive losses we saw a decade ago. Many economists see little potential for recession before 2020 at the earliest. Light recessions and market declines are not reasons to get out of the market. They are opportunities for reinvested dividends and interest to buy shares at cheaper prices.

A recent quote from Warren Buffet may help any potential feelings of panic amid bad headlines. “You will continue to suffer if you have an emotional reaction to everything that is said to you. True power is sitting back and observing things with logic. True power is restraint. If words control you that means everyone else can control you. Breathe and allow things to pass.”  Breathe deeply when opening year-end investment statements.  Markets do have a bad year now and then. Nevertheless, there are many more good years than bad.  Remember your long term focus, stay in a diversified portfolio, and reach out to us if you would like to discuss any concerns.