What happened in the market last quarter? What is the outlook?
4th Quarter 2018 Analysis
It was a bumpy, volatile quarter. The major indexes suffered their worst quarterly declines in roughly a decade.The S&P 500 ended down -4.4% for the year.
Stocks declined into bear territory during the quarter, declining more than 20% from their recent highs.Stocks were also especially volatile, with the S&P 500 Index recording intraday swings of more than 1% on four out of five trading days-with 10 days seeing swings of over 3%.Plunging oil prices caused the energy sector to be the worst performer in the S&P Index, falling by nearly 24% on a total return basis.
Sentiment was poor throughout most of the quarter, but the reasons for investors’ discontent appeared to shift markedly.Early in the quarter, the market’s losses seemed to be driven by concerns that the U.S. economy was in danger of overheating, which would lead the Federal Reserve to quicken or extend its pace of interest rate increases to fight of inflation.At the start of October, stock prices fell as longer-term bond yields jumped with the yield on the benchmark 10-year Treasury note reaching 3.25%, its highest level since the summer of 2011.Higher bond yields threaten to increase corporate borrowing costs while making equity dividends less appealing in comparison.The stock market dropped 7% in October.
Yields soon reversed course alongside the economic outlook.Weekly jobless claims began climbing in November, and retail spending data released in the month proved disappointing.Evidence also accumulated that capital expenditure was slowing, defying hopes that the previous year’s tax cuts would spark a boom in business investment.Meanwhile, rising mortgage rates appeared to take a toll on the housing sector.New home sales in fact fell sharply in October and price increase appeared to be moderating.Investors worried that the sharp drop in oil prices-which declined by more than 35% in the quarter- indicated underlying weakness in the global economy.Initially, investors seemed to welcome the moderation in economic growth and stocks rose about 3% in November.
Markets declined further, however, as the November payroll report proved to be disappointing.In early December the Treasury yield curve inverted which means that shorter term Treasurer were yielding more than longer term ones.This is often a sign of recession.This returned to normal shortly thereafter.Meanwhile, concerns about a deepening trade war between the U.S. and China seemed to weigh on markets as we moved through the month.The mood brightened near the end of the month when President Trump tweeted that he had made “big progress” on a call with the Chinese leader.
Showing continued extreme volatility, stocks were down the week ending Christmas Eve by 7%.Christmas Eve saw a drop of 660 points in the DOW.The day after Christmas, stocks rallied again and the DOW had its biggest point gain in history, up 1,087.For the week ending the year stocks were up 6 ½ %.
The stock market was excellent for three quarters.The fourth quarter turned out to be difficult as described above. Our clients' portfolios were well diversified across industries and market cap of companies. This diversification positioned them to perform better than the overall market in 2018.
We considered industry diversification to insure that not too many dollars were concentrated in one area of the economy. We further checked to insure that all funds were not in one area such as large growth or large value. Most of our portfolios were over weighted in the large-cap area, however, as large-cap funds tend to be safer than mid-cap or small-cap funds in time of turmoil and decline.Having the majority in the large-cap area is one more safety factor when markets are volatile.
Outlook for 1st Quarter 2019
Despite the drop this past year, we expect 2019 to be prosperous.Since Christmas the market is up +12%.For the year through January 21st it is up +6%.This gain basically wipes out the loses that occurred in 2018.
We believe the fundamentals are still positive. GDP is up around 3.5% for the year. Wages are up, unemployment is at 40 year lows. These factors are important because consumers make up 70% of the economy. In addition, corporations still have record earnings. We think the drop is overdone. Concerns over interest rate hikes and Chinese trade should be temporary. There have been 18 mid-term elections since 1946. Over the next 12 months following each of these elections the market has been up every year...on average 16.7%. That is regardless of who won the election.
~Bruce A. Kraig, January 20, 2019
Bruce A. Kraig Associates
An unbiased, independent RIA serving our clients' best interests since 1991