December 31, 2018 Market Recap

Financial Markets – A Recap of 2018 and a Look Ahead at 2019


  • Market volatility significantly increased in the 4th quarter on the back of slower economic growth, ongoing political and trade risks, and an increase in US interest rates. The S&P 500 Index, a broad measure of US Large Cap stocks, fell 9.03% in December which was the worst December since 1931 when the Index fell 14.53%.
  • For the calendar year of 2018, the S&P 500 Index declined 4.39% which was the worst annual return since 2008 when the Index fell 37.00%.
  • Market participants were expecting the US Federal Reserve Chairman, Jerome Powell, to be more accommodative at the December FOMC meeting. When Powell delivered a speech, which was more restrictive than anticipated, the S&P 500 Index sharply declined.
  • We have been preparing for this increase in volatility as our portfolios have been diversified across geography, region, and asset class since the start of 2018. Our portfolios remain diversified to help navigate turbulent markets.


US Federal Reserve

  • As widely expected, the US Federal Reserve raised interest rates by 25bps at the December FOMC meeting. The Federal Funds Effective Rate (a measure of overnight US interest rates) is 2.40% as of December 31, 2018.
  • The US Federal Reserve Chairman, Jerome Powell, forecasted 2 additional interest rate hikes in 2019. Furthermore, Powell gave no hint that the FOMC is considering altering its balance sheet reduction program.
  • Given the recent weakening in global economic indicators, the significant increase in volatility, and the decline in market liquidity, we believe the US Federal Reserve will need to be more accommodative for markets to stabilize.
  • It’s important to keep in mind the big picture. US stock valuations are relatively not expensive, and the broader US economy remains on solid footing. In the context of accomplishing your long-term investment goals, short-term moves are difficult to predict and provide an opportunity to rebalance your portfolio.



  • The outcome of the US-China presidential meeting at the G20 conference was better than expected. Following the meeting, the US agreed to leave the tariff rate on US$200bn of Chinese products at 10% rather than hike to 25% on January 1, 2019. Meanwhile, China agreed to start purchasing US agriculture goods immediately. Both China and the US agreed to start further trade negotiations. If no agreement is reached in 3 months, the US will raise tariffs on US$200bn of Chinese goods to 25%.
  • Should there be a positive resolution in trade policy, we believe that Emerging Market equities will benefit the most as the MSCI Emerging Markets Index declined 14.49% in 2018.


 Economic Data, Earnings, and Valuations

  • Global economic data deteriorated in 2018 which was a key driver behind the dispersion in stock index returns across the world. The JP Morgan Global Manufacturing Purchase Managers Index, a measure of economic health for the manufacturing and service sector, declined steadily last year (see chart below).
  • In 2018, the US economic data was stronger relative to international markets. The Conference Board US Leading 10 Economic Indicator Index remains at 50-year highs (see chart below), the Conference Board Consumer Confidence Index remains near 20-year highs, unemployment is at the lowest level since 1969, and the Atlanta Fed GDPNow GDP Forecast is 2.74% as of December 21, 2018. It is worth highlighting that the Atlanta Fed GDPNow GDP Forecast reached a high of 5.38% on February 1, 2018.
  • The S&P 500 Index forward P/E ratio was 14.5x as of December 27, 2018 which is below its average over the past two decades (16x). Broadly speaking, we believe that US Large Cap stocks are attractive at these valuation levels for long-term asset allocation strategies.


International Equities

  • The global synchronized economic recovery, which resulted in all major equity indices posting positive returns in 2017, fell apart in 2018. There are growing divergences in which the US is producing stronger economic data compared to most Developed and select Emerging Markets.
  • As noted above, a stronger US dollar along with elevated trade risk significantly hurt the performance of Emerging Markets stocks in 2018. Additionally, the European Central Bank ended its Asset Purchase Program in December 2018.
  • US equities outperformed their global counterparts by a significant margin in 2018. The S&P 500 Index was down 4.39% while the MSCI All Country World Index excluding the US (in USD terms) was down 14.20%, the Euro STOXX 50 (Europe) declined 11.78% (in Euro terms), the Nikkei 225 (Japan) declined 10.39% (in Japanese Yen terms), the MSCI Emerging Markets Index declined 14.76% (in USD terms), and the Shanghai Stock Exchange Composite Index declined 22.74% (in CNY terms) in 2018.
  • The Bloomberg Dollar Spot Index (BBDXY) rose 3.34% in 2018. In our view, International equities will benefit to a greater degree if there is a resolution on trade policy.


Fixed Income

  • US Fixed Income still plays an important role in your portfolio as a diversifier and volatility dampener. In Q4 of 2018, US fixed income benefited from the turmoil in the US Stock Market as The US Aggregate Bond Index was up 1.64% for the period.
  • US fixed income yields rose significantly from January through November but witnessed a sharp descent in the final 7 weeks. Yields on 2-year, 10-year, and 30-year US Treasury Bonds were 2.49%, 2.68%, and 3.01% respectively as of December 31, 2018.

Commodities and Alternatives

  • A stronger dollar, a decline in inflation and trade tariffs proved to be an unpleasant scenario for most commodity markets in 2018.  There was a significant supply and demand imbalance for many commodities due to trade policy risks. The New York Federal Reserve Underlying Inflation Gauge peaked in June 2018 and has since declined (see chart below). 

 A Look at 2019

Having a well-developed financial plan along with a diversified portfolio are crucial to helping you achieve your long-term investment goals.

We look forward to your feedback on this revised market review and forward-looking commentary. Please know that we recognize and acknowledge the fear and uncertainty that can spread from the recent declines. Clearly, we are “out of emotional practice” having not had to absorb losses substantively since 2008. History has repeatedly shown us, however, that the long-term trend is up and to the right – you, and we, are long-term investors.