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2018 Year-End Market Report  

from Blue Summit Wealth Management

We hope you all had a wonderful Holiday Season!  We enjoyed being here for you during the bumpy market year of 2018, and whatever 2019 brings us, we will continue to be right alongside of you.

Looking back, it was a strange investment year in many respects.  First, the markets endured two major slumps--from late January to early February, and again from early October and especially through December.  Christmas eve notched the worst market drop on record percentage wise, yet the day after Christmas was one of the best single days of the year percentage wise. This will be the first time since 1948 that the S&P 500 index rose in the first three quarters and then finished the year in the red. 

 

Meanwhile, for unlucky investors in the Bitcoin cryptocurrency, the year's investment news may have rivaled the crashing of the famous Dutch Tulip craze.  The entirely-made-up currency, backed by no government or pool of assets, dropped from a high of $20,000 per "coin" down to $3,800. 

A breakdown shows that just about every investment asset dropped in 2018. 

Looking at large cap stocks, the widely-quoted S&P 500 index of large company stocks lost 13.97% during the year’s final quarter and overall finished down 6.24% in calendar 2018.

I

n the bond markets, coupon rates on 10-year Treasury bonds have risen incrementally to 2.68%, creating the unusual situation of losses in bond investments in the same year as losses in stocks.   Similarly, 30-year government bond yields have risen slightly to 3.01%.  Five-year municipal bonds are yielding, on average, 1.96% a year, while 30-year munis are yielding 3.09% on average.

If you look at the accompanying chart, which shows returns since 2008 in 15 different asset classes, you can see that 2016 and 2017 were extraordinary years; everything went up (as shown in green).  2018 was extraordinary in the opposite direction.  But that also, of course, provides you with a chance to buy investments at discounted prices in the new year.  This should be seen as an opportunity.

 

 

 

 

 

Many investment professionals had been expecting a bear market much sooner than this.  Bear markets tend to occur about every 3.5 years, and there have been 32 of them since 1900.  So far the current decline of just over 20% pales in comparison with the 86% drop in the 1930s, or the 57% drop from 2007 to early 2009.  But there is no reason to imagine that we are at the end of the current down cycle.  With the government shutdown, reckless trade wars, a rapidly growing federal deficit, political uncertainty and the ever-looming possibility of a recession, investors are understandably nervous about the near-term future.

Most economists are reluctant to predict an economic downturn when unemployment is at record lows, but there were some warning signs in December.  Five Federal Reserve regional factory indexes all dropped in unison in December, the first time that has happened since May 2016.  There are increasing signs that many factories are suffering from the uncertainty around U.S. trade policy, including tariffs on imported steel, aluminum and about $250 billion of Chinese products.  At the same time, consumer confidence has fallen to its lowest level since July, and a measure of the employment outlook experienced the biggest plunge in 41 years.  As evidenced by history, economic expansions do not continue forever, and this recent bull run was one of the longest in history.  

Nevertheless, by all measures, the U.S. economy is still growing, and nobody can predict whether the markets will stabilize in 2019 or experience more decline.  All we know is that, historically, all bear markets in history have been temporary phenomena.  Furthermore, since 1982, market declines have been relatively brief.   Earlier, market declines have lasted longer.  After the 1929 crash, it took investors 16 years to regain high ground.  In 2000, about 5 years.  In 2008, about 4 years.  In 1987, about 2 years.  In 1990, about 8 months.  There will be some who lose their nerve and sell in a panic during the downturn while investors who remain invested will be rewarded in time.  This has been proven time and time again and is shown in the below chart using the 2008 downturn as an example.

 

 

There is an old cartoon that shows the announcer telling the audience what really every stock market report ought to say: "Today, the investment markets provided another interesting day of white noise."  The day-to-day fluctuations are more akin to the last roulette spin predicting the next…they tell us nothing about the future, and the best prediction is that most predictions will turn out to be incorrect.  We don't know what's coming, but we know it has always been a good strategy in the past to minimize the noise and leverage the most historically well-performing feature of the market…time.  

We hope you find this year-end Market Report interesting and insightful. As always, feel free to pass these articles

to others or share your comments with us!

Robert Seid  | January 07, 2019