- US stocks suffered their first calendar year loss, after 9 consecutive years of gains.
- Healthcare was the best sector for the year, up 6.47%.
- Bonds had a rough first half of the year but did as we expected in the fourth quarter.
The S&P500 suffered its first annual loss since the financial crisis, dropping 4.38% in 2018 after a tumultuous fourth quarter that saw the worst December since 1931. Stocks started their descent in October and saw wild swings in direction through the rest of the year. The dramatic moves in the market led us to believe that algorithmic and robotic trading dominated the movements. Such trading tends to focus on short term data, not long-term fundamentals. After years of a sustained rally, it is not very surprising that markets retreated, but the severity of the decline was. There is no shortage of concerns: the government shutdown, slowing global growth, trade uncertainty, interest rate policy and a slowdown in earnings growth in 2019. However, it does not appear the US is headed for a recession in 2019 as the selloff might suggest. Economists are predicting that the US economy will grow in the 2% range; not the 3-4% we expected in 2018, but growth, nonetheless. Unemployment is at all-time lows with decent wage growth, holiday spending in 2018 was the best in years, and financial conditions are still accommodative.
Large cap stocks outperformed their mid and small counterparts for the year, with the Russell indices dropping 9.06% and 11.01%, respectively. During the fourth quarter value outperformed growth, but growth still finished the year on top (-1.51% vs. -8.27%). The best sectors for the year were healthcare +6.47%, utilities +4.11% and consumer discretionary +0.83%. Energy -18.10%, materials -14.70% and industrials -13.29% were the worst performers and reflect investor expectations for a slowdown in global growth
International developed stocks dropped 13.79%, while emerging markets lost 14.58% for the year. Continuing concerns over global trade have been hindering investment for both businesses and investors across the globe. Large exporter nations saw the worst declines for the year: Germany -22.18%, Korea -20.94% and China -18.88%. While things haven’t looked promising on the international investing front, valuations are very attractive, and Nuveen Investment Management thinks international equities may outperform the US in 2019.
Interest rates plunged in December as investors poured out of equities and into the relative safety of bonds. For the year, the investment grade bond market gained 0.01%. While that may seem unattractive, bonds did just what we hoped they would do during the selloff Q4: stocks lost 13.52% while bonds gained 1.64%. High yield bonds (which are highly correlated with stocks) dropped 4.54% for the quarter as credit spreads widened. Short term Treasuries +1.86% and municipal bonds +1.28% were the best performers in the fixed income market for 2018.
On behalf of everyone at Bernardo Wealth Planning, we would like to wish you and your family a joyful, healthy, prosperous and happy New Year.
Bill Roth, CFA