Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Fourth Quarter of 2018. The excerpt is posted here for the benefit of our blog subscribers.
US Stocks Tumble Toward Bear Market Territory, Finish 2018 in the Red
The final quarter of 2018 brought a storm of worries that battered US stocks, wiping out year-to-date gains. Slowing in US corporate earnings growth and concerns about economic weakness globally had many worrying about the potential for recession soon. Add to this a nasty cocktail of rising interest rates, heightened global trade concerns, and worries of a no-deal Brexit, and it all made for a volatile quarter in which US stocks slid 13.5% to finish the year down 4.4%, as measured by the S&P 500 stock index.
Excluding energy stocks (which we discuss in more detail later), the industrial and technology sectors were among the hardest hit in the fourth quarter, each falling 17.3% on the period. Many market sectors were hurt by deteriorating US-China trade relations, which seems to be curtailing foreign demand for everything from basic raw materials to advanced Apple iPhones. The less economically sensitive sectors fared best, with utilities rising 1.3% on the quarter and consumer staples dropping a relatively modest 5.2%. For the year, healthcare (up 6.5%) and utilities (up 4.1%) were the best performers.
Mid and small cap US stocks underperformed large caps on the quarter as well as on the year, falling 18.0% in the fourth quarter and 9.5% for the year, as measured by the Wilshire 4500 stock index. Large caps barely avoided a bear market in the fourth quarter (defined as a 20% or more decline). However, mid and small cap stocks were not so fortunate, dropping more than 24% from peak to trough. Investors often favor larger “high quality” companies during periods of economic and market weakness, so it was not surprising to see large caps come out ahead.
The market’s plunge sent volatility soaring in the fourth quarter. The VIX volatility index began October 1 at an extremely low reading of 12. It proved to be the calm before the storm, with VIX quickly jumping to 28 on October 11. It then hovered in the high teens to low twenties before spiking again on Christmas Eve, when it reached 36, before dropping back to 25 at year-end. It was a wild ride that tested the resolve of all manner of investors.
International Stocks Decline Sharply Amid Signs of Slowing in Europe and China, Brexit Mess
The weakness in US stock markets followed a poor year abroad, with international developed stocks trading sharply lower. The MSCI EAFE index fell 12.5% in the fourth quarter, putting full year 2018 returns at a dismal -13.4%. Eurozone pessimism grew throughout the quarter as the Brexit divorce plan negotiated between the EU and the UK met stiff opposition in the British parliament. Meanwhile, Europe’s economy showed signs of deceleration, with GDP growth continuing to slow. The US dollar also created headwinds for foreign investments in the fourth quarter, rising roughly 2% versus the euro and the pound, though falling 3% against the yen. For 2018, the dollar rose noticeably against most major currencies, including a 5% gain against the euro.
For the third consecutive quarter in a row, emerging markets stocks declined, with the MSCI Emerging Markets index falling 7.4% on the quarter and 14.3% on the year. Weakness in the global energy and commodity sectors, combined with uncertainty surrounding US-China trade relations, knocked prices lower. Concurrently, Chinese stocks suffered their worst quarterly decline since 2015 amid slowing economic growth. Brazil was the one bright spot, rising 14.3% after the election of a new president.
To continue reading, please see our entire Economic and Market Review (link will open in a new window).