Year in Review – 12 Months Ended December 31st, 2018
The world endured an uncomfortable degree of political uncertainty, much revolving around US efforts to remake the world trading/economic order. After a long period of investor complacency, concerns about the impacts of this policy were clearly demonstrated by the end of 2018. Despite the apparent momentum behind populist leaders in several countries, corporate influence and profits remain at astounding levels.
Most national economic statistics were relatively strong. The year was exceptionally positive for the American economy and consumer. Moderate growth continued, purchasing power gathered strength due to low inflation, and wages rose a bit faster than in previous years as unemployment fell to levels considered impossible just a few years ago.
The Federal Reserve continued its actions of raising interest rates and shrinking its swollen balance sheet. For years, the Federal Reserve has warned of the imminent onset of inflation, given economic growth and low unemployment. The absence of inflation has prompted a re-think at the Fed and official optimism on this front has increased. Tariffs have the potential to filter into inflationary pressures, although to date effects have been modest.
Major Economic Events
Growth in the US was a bit above average. Employment expanded at an increased clip, inflation remained under control, and housing prices rose. Consumer confidence remained very high, as evidenced by high spending. An interesting economic finding was revealed when government statisticians discovered that official data has - for years - been understating the savings rate, and that indeed the economy was better balanced between spending and saving than had been reported.
Every major region experienced economic growth, although there were some sputters in 2018. Europe’s economic recovery faded a bit. The British economy under-performed. Contrary to what most expected however, the interminable Brexit saga has not had a drastic effect on British and European economies. China’s growth continues to impress, but is far below the rate achieved during the past decade.
Oil prices plunged at the end of 2018. American supply has surged, OPEC’s efforts to contain the market sputtered, and the drastic sanctions that were to be placed on Iran’s oil exports never materialized.
The Equity Markets
Stocks globally had a poor year and ended the year down nearly 10%. A very sharp fall during the 4th quarter resulted in a negative year for US stocks, the first since 2008. An unfortunate confluence of a Federal Reserve interest rate hike, some tepid economic news, and the proclamation by President Trump that he is a Tariff Man shook investor confidence dramatically.
Despite a dreadful 4th quarter, technology stocks ended the year slightly ahead. Health care and utilities also had positive results. Energy and financial stocks lagged badly. Growth stocks bested value, although the gap narrowed significantly when technology stocks sold off.
International stocks trailed the US for the year, although the gap narrowed in December. Europe, Japan, and emerging markets ended the year with comparable losses. The Trump administration policy of confrontational trade stances and tariffs significantly impacted many countries, most particularly China. Lastly, several countries paid the price for economic mismanagement and political turmoil, most notably Turkey and Argentina.
Natural resource stocks were pummeled by the plunge in oil prices. REIT prices fell during an inflation scare in February, recovered, and then fell during the market mayhem at the end of the year. One positive aspect of REIT results was that correlation with the broad stock market was relatively low.
Overall, the effects of diversification from the traditional S&P 500 index were very negative. Every major asset class fell significantly short of the S&P 500, with the exception of REITs.
The Fixed Income Markets
Bond prices rallied as stock prices fell in October and December and ended the year virtually unchanged. The Federal Reserve continued its policy of gradual rate increases. High yield bonds fell in value as investors have grown more concerned with excessive debt on company books. International bonds fared no better. Cash and similar investments have benefited from the Federal Reserve’s increases in rates.