Oh, what a year it’s been: Excerpts from our 2018 year-end review
The following are excerpts from the 2018 Year-End Review, produced by the Global Investment Management team. Read the full report.State of the Markets Address
For the first time since the financial crisis, U.S. stock markets ended the calendar year in negative territory after events in geopolitics, economic data, and monetary policy whipsawed investors.
Global stocks, per the MSCI ACWI Index, slumped 8.93% in 2018, with U.S. stocks faring quite a bit better than their international counterparts. The S&P 500 Index lost 4.39% for the year compared to declines of 13.32% and 14.35% in international developed stocks and emerging market stocks, respectively, according to MSCI data. Financial markets saw volatility make a spectacular comeback in 2018. Despite losses in stocks, bonds did not provide much shelter from the storm, though certain bond sectors were able to tread water.
The Barclays U.S. Universal Bond Index, which attempts to track the broad taxable U.S. bond market, lost 0.25% during 2018. As investors flocked to safe haven assets, those sectors outperformed the overall market. Based on Barclays data, Treasuries and mortgage-backed securities performed well, gaining 0.86% and 0.99%, respectively, while credit-sensitive sectors underperformed. Similar data shows that investment grade corporate bonds lost 2.51%, while high-yield actually performed better, losing 2.08% for the year. Tax-exempt municipal bonds were one of the best performing asset classes of the year, gaining 1.28%, according to Barclays’ data.
Alternative assets weren’t exempt from the negative sentiment that impacted financial markets over the year. Commodities were directly affected by trade issues with coffee, sugar, and crude oil leading losses; the Bloomberg Commodity Index lost 12.99% in 2018. Global real estate prices declined 5.58%, according to MSCI data. Hedge funds, which typically perform well in periods of volatility, lost value during the year and were down 4.60% per HFR data. Catastrophe bonds, which are linked to global weather events, gained and were up 2.53% according to Swiss Re data.Earnings Astound Investors
Stock markets got off to a rocky start in 2018, with a notable gain in January before a slump in February. Investors were likely reacting to rising longer term rates and the 10-year Treasury yield closing in on the 3% area. The middle stretch of the year was distinct due to compelling gains as the U.S. earnings engine shifted into high gear. Lower tax bills for corporations seemed to be the key driver for some of the best earnings ever recorded. Earnings in the first three quarters neared an astounding 25% growth rate with the fourth quarter on track for another double-digit increase, according to Bloomberg data. From the low in February to the high in September, the S&P 500 gained about 15%, which we believe was mostly attributable to those earnings numbers.
Geopolitical risk easily became the one of the largest influences on domestic and global stock markets in 2018, and was likely the main contributor to uncertainty and volatility during the year. The trade war between the U.S. and China was a constantly evolving situation with markets reacting to the tit-for-tat responses from each country’s government. However, a temporary truce between President Trump and Chinese President Xi Jinping during a Group of 20 summit halted further escalation.
Internationally, Brexit continued to be a struggle for European markets due to a lack of clarity on whether a deal could be reached between Britain and the European Union. The EU now seems ready to make an example of the U.K. to deter any other potential exits of member countries. Both the trade war and Brexit have hard deadlines at the end of February and March, respectively, of 2019. If either one of these geopolitical risks goes unresolved, the economic and financial consequences will likely propel global stock markets.
Despite notable mid-year gains and continued robust earnings growth, U.S. stock markets took a turn toward volatility at the end of 2018, mainly due to a sudden shift in longer term rates and uncertainty over the Fed’s rate path. Global stock markets were even worse off due to a lack of strong earnings. The S&P neared a bear market during the end of the year selloff with the 2018 peak-to-trough decline reaching -19.78% on December 24 before recovering in the remaining days of the year.
Read more of the 2018 Year-End Review.
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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
Diversification and asset allocation do not ensure a profit or guarantee against loss.