What a year! Marked by extreme volatility, 2018 put in the worst stock market performance since 2008. What was behind all the back and forth?
The Big Picture
2018 started out like gang-busters with stocks continuing the ascent started in March of 2009. Then a hiccup in the form of tariffs on steel and aluminum, washing machines and solar cell imports started the long-awaited correction.
The Federal Reserve Bank didn’t help the bulls by raising short-term interest rates four times in 2018; in March, June, September and December, making it more expensive for corporate and consumer borrowers.
Subdued earnings, regulatory fears and falling oil prices put a cap on stock prices while uncertainty and confusion grew as the year progressed. Trade worries figured prominently with the North American Free Trade Agreement abandoned by the administration in favor of a renamed (if not re-worked) agreement that has yet to be approved by Congress.
Increased trade tensions with China threaten to delay corporate investment, disrupt global supply chains and cause a drop in export prices due to weaker demand. Prices for soybeans declined along with demand. U.S. Farmers export 17% of their annual soybean production. The U.S accounted for 33% of China’s soybean imports. Lack of demand will continue to depress soybean prices. Crude oil prices will remain under pressure as China’s slower growth means less demand for energy. The limited upside for those asset prices may benefit U.S. Treasuries as a flight-to-quality lifts prices and causes yields to fall.
China isn’t the only uncertain global variable. The United Kingdom’s decision to leave the European Union after 45 years of political and economic partnership has roiled Europe. As the saying goes, the devil is in the details and those details were poorly thought out. Those pushing for “Brexit”, as this divorce is commonly called, are strangely silent as the deadline nears and no clear solution exists for the treatment of the U.K citizens in the other E.U nations, other E.U citizens in the U.K, and the treatment of the border between Ireland and Northern Ireland.
Markets hate uncertainty and confusion. After setting new all-time highs in September (the S&P 500) and October (the Dow Jones Industrial Average), major stock market indices retreated into correction territory, threatening to enter bear market territory as the year drew to a close. December saw the worst price action since 1931 with no Santa Claus rally. Christmas eve saw the worst stock market performance ever with the Dow off 2.9%, the S&P 500 down 2.7% and the NASDAQ shedding 2.2% at the end of a mercifully short trading session and the start of a 35-day government shutdown.
I, Investor
Santa finally made his appearance the day after Christmas, helping stocks – especially those in the Dow Jones Industrial Average – post the largest post Christmas rally ever. That strength carried over into the new year with January, 2019 posting the best stock market performance in 32 years!
Does this portend a good 2019 for stocks? Don’t get too cocky. Remember, January 2018 started out strong as well, so don’t read too much into this market action. Such a rapid rebound requires caution. Loose cannons remain on deck. Slower economic and earnings growth could disappoint investors. Political turmoil here and abroad remains a threat. Protectionism, tariffs and trade wars rarely end well, while the President’s State of the Union address failed to lay out a clear path forward.
While the economic fundamentals remain supportive, don’t rule out shocks to the system. Remain diversified to manage unforeseen risks.
WORST TO FIRST?
What a year! Marked by extreme volatility, 2018 put in the worst stock market performance since 2008. What was behind all the back and forth?
The Big Picture
2018 started out like gang-busters with stocks continuing the ascent started in March of 2009. Then a hiccup in the form of tariffs on steel and aluminum, washing machines and solar cell imports started the long-awaited correction.
The Federal Reserve Bank didn’t help the bulls by raising short-term interest rates four times in 2018; in March, June, September and December, making it more expensive for corporate and consumer borrowers.
Subdued earnings, regulatory fears and falling oil prices put a cap on stock prices while uncertainty and confusion grew as the year progressed. Trade worries figured prominently with the North American Free Trade Agreement abandoned by the administration in favor of a renamed (if not re-worked) agreement that has yet to be approved by Congress.
Increased trade tensions with China threaten to delay corporate investment, disrupt global supply chains and cause a drop in export prices due to weaker demand. Prices for soybeans declined along with demand. U.S. Farmers export 17% of their annual soybean production. The U.S accounted for 33% of China’s soybean imports. Lack of demand will continue to depress soybean prices. Crude oil prices will remain under pressure as China’s slower growth means less demand for energy. The limited upside for those asset prices may benefit U.S. Treasuries as a flight-to-quality lifts prices and causes yields to fall.
China isn’t the only uncertain global variable. The United Kingdom’s decision to leave the European Union after 45 years of political and economic partnership has roiled Europe. As the saying goes, the devil is in the details and those details were poorly thought out. Those pushing for “Brexit”, as this divorce is commonly called, are strangely silent as the deadline nears and no clear solution exists for the treatment of the U.K citizens in the other E.U nations, other E.U citizens in the U.K, and the treatment of the border between Ireland and Northern Ireland.
Markets hate uncertainty and confusion. After setting new all-time highs in September (the S&P 500) and October (the Dow Jones Industrial Average), major stock market indices retreated into correction territory, threatening to enter bear market territory as the year drew to a close. December saw the worst price action since 1931 with no Santa Claus rally. Christmas eve saw the worst stock market performance ever with the Dow off 2.9%, the S&P 500 down 2.7% and the NASDAQ shedding 2.2% at the end of a mercifully short trading session and the start of a 35-day government shutdown.
I, Investor
Santa finally made his appearance the day after Christmas, helping stocks – especially those in the Dow Jones Industrial Average – post the largest post Christmas rally ever. That strength carried over into the new year with January, 2019 posting the best stock market performance in 32 years!
Does this portend a good 2019 for stocks? Don’t get too cocky. Remember, January 2018 started out strong as well, so don’t read too much into this market action. Such a rapid rebound requires caution. Loose cannons remain on deck. Slower economic and earnings growth could disappoint investors. Political turmoil here and abroad remains a threat. Protectionism, tariffs and trade wars rarely end well, while the President’s State of the Union address failed to lay out a clear path forward.
While the economic fundamentals remain supportive, don’t rule out shocks to the system. Remain diversified to manage unforeseen risks.