– 2018: A Brief Summary of a Tough Year –
2018 Market Review:
To say 2018 was a difficult year is putting it very lightly. Despite solid U.S. economic fundamentals and global economic growth, 2018 turned out to be the most challenging year for investors in over a decade. The question now on everyone’s mind: is this the start of something worse or just a bad down move in an up market? We believe it’s the latter, but we are closely monitoring a myriad of market and economic indicators to help us forecast if something worse is coming our way.
Just how bad was 2018? It was the first year in 68 years that the U.S. stock market underwent two separate 10% drops[1]. Since 1945, the stock market has declined between 10%-20% only 27 times in total[2], so the fact it dropped twice in such a short time span is genuinely extraordinary. Moreover, 2018 saw the markets suffer their biggest annual loss since the 2008 financial crisis. Lastly, the Dow Jones Industrial Average and S&P 500 experienced their worst December since 1931.
Stocks were not the only investments to suffer. The U.S. bond market was on track for only its 4th negative year since 1976[3], but eked out a paltry 0.01% return for 2018. Stocks were down, bonds were flat, gold and commodities were down, etc. There was no place for investors to hide last year.
2019 Market Outlook:
We are cautiously optimistic about the markets in 2019. To quote the great investor Warren Buffett, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” We believe this sage advice applies today. Fear and worry are high while economic fundamentals are still reasonably strong.
The market decline at the end of 2018 behaved similarly to the “bear cubs” Michael wrote about in an article published last October (which can be found here). In essence, large market declines as we recently experienced can happen outside of a recession, though they are rare and are made back much quicker than traditional bear markets. The big bear markets we all fear tend to last years and take years to recover. The hallmarks of a traditional bear market – an economy shrinking instead of growing, markedly declining corporate earnings, and lofty stock valuations – are not present. This further leads us to believe the markets have been unnecessarily oversold and will bounce back.
The vicious selloff during the last three months of 2018 signal the market is prone to bouts of volatility. And that could happen again in 2019. It’s imperative to remember one should make investment decisions based on changing fundamentals, not changing prices. With economic fundamentals intact, the best prescription now is patience. Time in the market, not timing the market, is the key to capitalizing on stock market gains.
[1] Source: J.P. Morgan Asset Management as measured by the S&P 500
[2] Source: Guggenheim Investments
[3] Source: J.P. Morgan Asset Management as measured by the Barclays Aggregate Bond Index
Published on January 14, 2019