In case you turned off the news and/or were hiding under a rock for the past couple months, you may not have noticed that the final quarter of 2018 was not the best for equity markets around the world. December specifically made headlines for being one of the worst performing months in recent history. The US central bank rose rates for the 4th time, we saw weak Chinese growth, and of course – geopolitical concerns all proving to upsetting to the markets. We shouldn’t let that bring us down though. You know why? Pullbacks, for better or for worse, are part of investing.
Here’s how some of the major metrics fared:
|S&P 500 Large Cap Index||-13.97%||-6.24%|
|S&P Small Cap 600 Index||-20.43%||-9.75%|
|S&P Developed BMI International Index||-14.32%||-11.37%|
|S&P U.S. Aggregate Bond Index (total return)||+1.41%||+0.08%|
|S&P Municipal Bond Index (total return)||+1.52%||+1.36%|
|Dow Jones Equity All REIT Index||-7.06%||-7.97%|
|Dow Jones Commodity Index (spot return)||-8.39%||-8.39%|
|Source: Dow Jones, data as/of 12-31-2018 (doesn’t include dividends unless noted)|
Looking at the year’s performance, large cap stocks outperformed small cap (two years in a row), but growth stocks reversed course and relatively under-performed value stocks. Although most major markets ended with negative returns for the year, the S&P 500 did well relative to international markets such as Europe, Asia, and Japan. One safe haven in Q4 was bonds, as most bond indexes had a positive quarter and positive year – although nothing to write home about. If you are wondering what oil did: WTI crude oil spent most of the year in the $65-75 range, before dropping to approx $45 by year end. Good news at the gas pumps at least, not good for corporate profits (oil companies make up a good chunk of the economy). You can view a comprehensive list of index returns here.
Interest rates (as measured by the 10-year treasury bond) finished at 2.65%, which was predictably higher from where it started the year. The Fed has now raised rate 9 times since 2015 and many think the end is within sight. We may see another rate hike or two in 2019. One thing to pay attention to is higher yields on cash/CDs/savings accounts. After years of earning almost nothing on your “cash”, most online savings accounts are paying 2% or higher these days. It’s not earth-shattering, but it might be worthwhile to review your cash holdings to make sure you are getting something similar. This could very well approach 3% if rates tick higher, so it’s worth paying attention to.
With diversified portfolios, some investments usually “work” better than others in any given year. Typically bonds do well if stocks are down (such as year 2008), and vice versa (2013 was slow for bonds and very good for stocks). Similarly, if stocks and bonds both struggle, usually we see gold, commodities, REITS, etc. outperform. In 2018 most asset classes struggled and there was really no place to hide. Bonds and cash provided slightly positive returns. But I would encourage you – the diversified portfolio investor – to not be discouraged. We can always revisit the “risk discussion” if you want to either a) reduce your investment risk or b) increase your market risk, but as time has shown, making long-term portfolio decisions based on short-term events is not typically a recipe for success.
I would like to remind you that this is just a snapshot in time. Had we taken the snapshot a month earlier, 2018 was looking like a pretty good year. For example, you may have looked at your portfolio in November and thought “Wow – not too bad! My portfolio did really well in 2017 and we’re up again this year.” But after a swift pullback in December, you may be looking at a negative return for the year…and while that doesn’t look nor feel good, it’s part of the investing process. I feel the pain with you – not only am I am investor myself, but my compensation is directly correlated to my client’s accounts growing in value (so….I took a pay cut in 2018!). I am hopeful that over longer periods of time, we manage the ebbs and flows of the market and see much success.
To wrap up I will use my airplane analogy. We’ve agreed to take a journey together and we need to get there via airplane. It’s a long ride, and you’ve hired me to be your pilot. We’ve mapped out a plan and are cruising at 33,000 feet, and are starting to hit some turbulence. There are clouds and storms around us, so we check to make sure our seat belts are fastened and advised we may make some adjustments to our flight path. Despite the environment, your pilot keeps his eyes on the path forward while you are relaxing (hopefully!) in the back. Jumping out of the plane is not a sensible option, nor asking to turn around, since they won’t help us achieve our goals of getting to our destination. So we remain focused on the path ahead and making adjustments as needed to ensure we get there as smooth and efficiently as possible. Feel free to poke your head into the cockpit to see how things are going – I am always open to discussion!
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.