It was a Year to Remember
As far as investing is concerned, I prefer years that are easily forgotten. It’s easy to forget years where the market hits its “average performance”. Unfortunately, markets do not like to hit their averages each year. In fact, markets very rarely return their multi-year average in any single year. For the last century, the S&P 500 has returned an average rate of return of about 10% per year, yet from 1926-2018 the index has only returned between 8%-12% seven times. Seven years out of 92! As investors, this is the reality we must face. Markets over long periods of time have nice average rates of return, but any given year can be painful or delightful.
Looking back at 2018, I’m sure many will look at it as painful. It was certainly not as painful as the wounds caused during the Great Recession. But nonetheless it was unfortunately memorable. I believe for me, 2018 will stand out as a unique year, particularly the 1st and 4th quarters.
In January of 2018 we witnessed nearly every sector of the market skyrocket. This was particularly drastic movement considering 2017 was a phenomenal year. In the first few weeks of January the S&P 500 was up over 7%. This was a short lived run up that the market demolished in February, with record breaking drops in the Dow Jones, as the Dow experienced two drops of more than 1000 points. By the end of the quarter things had settled down a bit with most indexes down slightly.
In our Q1 Market Update, Brandon Carter talked about how too much of a good thing can be a bad thing. He noted that too strong of an economy will force the fed to raise interest rates.
“Let’s be clear; very few believe the economy and job market are overstimulated right now, but there are plenty concerned it will happen. If this does happen, the Federal Reserve will be forced to raise interest rates faster in an attempt to cool things off and that, too, will have a negative effect on the economy.” Brandon Carter; First Quarter 2018 Market Update
I know that my brother does not claim to be clairvoyant; however, looking back his statement turned out to be extremely accurate. The fed ended up raising interest rates 4 times in 2018 and tightened its balance sheet. (Translation: The fed was attempting to slow down the economy). The market disagreed with the fed decision to raise rates the 3rd and 4th time which when combined with trade war concerns ultimately led to a large market sell off in the fourth quarter.
The second and third quarters of 2018 were really quite mild. Markets enjoyed some modest gains and volatility was pretty tepid. The fourth quarter was really where the story of 2018 was written. October is a month famous for major market movements including Black Monday in 1987 and the start of the Great Recession in 2008. Although October of 2018 will likely not be as memorable as those two events, it did kick off some major selling that continued into November and December. The performance of the major indexes in Q4 left the market with negative returns for the year across nearly all major asset classes.
(U.S. Small Cap=Russell 2000, U.S. Large Cap=S&P 500, International Developed=MSCI EAFE, U.S. Bonds= Bloomberg Barclays U.S. Aggregate Bond Index, Long-term Treasuries= Bloomberg Barclays Long Term U.S. Treasury, Emerging Markets=MSCI EM)
In our opinion, the major downturn that occurred in the 4th quarter can be attributed to three major factors.
- Market sentiment around interest rates with most investors believing the fed raised rates too aggressively.
- Skepticism that President Trump’s trade dispute with China was not making any progress despite the 90 day pause on more tariffs.
- Concerns over slowing global growth. GDP growth has been slowing in many countries raising fears over a recession. It should be noted that a recession is two quarters of negative GDP growth.
Each one of these factors caused market participants to reevaluate prospects for growth in the future and as a result the market repriced downward. Therefore, the prospect of additional tariffs or the impact of higher interest rates is now priced into the cost of the market. If the market has overreacted and a trade resolution is reached or the fed pauses on interest rate increases the market will likely reprice upwards. Unfortunately for investors anticipating what new information will drive the market and jumping in front of that information is impossible.
In our opinion, the greatest risk among those three factors is a global slow down leading to a recession. A recession is a tangible economic incident which does justify a repricing of the market. Those other factors are at least at this point speculation. Because there is concern that a recession may be looming the market has partially factored in a recession. This means that should a recession not unfold in the near future the market overreacted to those concerns and is likely oversold. On the other hand, if it seems that a recession is imminent the market will likely continue to decline.
As we stated earlier this year, after 10 years of a bull market we were destined to meet a bear market at some point. By some metrics this did happen in December when the S&P 500 fell more than 20% from its all time high. Bear markets can bring some good news however, as we previously felt that many asset classes were overvalued we now believe that many of those valuations are no longer stretched. This gives us some optimism heading into 2019.
We understand that looking at your statements and seeing account balances go down can be stressful and scary. As most of you know by now, investing does not always yield positive results in the short term. By remaining disciplined, principled, and focused on the long term, we believe the pain of short-term gyrations can be marginalized. With that being said, our advisors are here for you. If you have questions, are feeling nervous, or just need an explanation, we are just a phone call away.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
This market update was written by Brice Carter.