Markets in 2018 turned out to be a roller coaster ride of ups and downs, but ultimately finished on a very sour note after a horrible 4th quarter. We began 2018 with optimism, having just come off a tremendous year in 2017 which saw 20%+ equity returns. Many investors were hoping the Tax Cut & Jobs Act of 2017 would continue the stock market rally for another year. January of 2018 appeared to do just that as the S&P 500 gained almost 6% for the month. The rise was short lived, however, and the market declined just under 12% over the next two months before bottoming near the end of March. From there, the stock market was either flat or up for the next six months and the S&P 500 ended September 30 with a year to date gain of 10%.
It seemed we were well on our way towards another good year, until October decided otherwise. The market began selling off in early October with concerns over rising interest rates and by the end of October, worries about the growing possibility of a trade war with China caused the S&P 500 to give up most of its gains for the year. We saw a slight rebound in November before December hit and again, continued worries about trade and rising interest rates (Federal Reserve) sent the S&P 500 down another 10%. The S&P 500 index finished the year down -4.38%, but when compared to the rest of the equity indices, outperformed. The Russell 2000 (US Small Cap Index) and the S&P 400 (US Mid Cap Index) both finished 2018 down -11% and the international indices, the MSCI EAFE Index and the MSCI Emerging Markets Index, finished down -13% and -14% respectively.
2018 was also not a great year for bonds. Rising interest rates caused a decline in the value of outstanding bonds, offsetting the interest earned for the year. The Bloomberg Barclays US Aggregate Bond Index finished the year flat at 0.01% return (which was actually an improvement over the ytd return of -2.38% as of 10/31). High Yield bonds lost about -3% in 2018 and International Corporate Bonds were down about -7% for the year. Floating Rate bonds managed to finish slightly positive, up about ½ of 1%, and municipal bonds finished with the strongest returns in fixed income up 1.28% for the year.
With all of that said, what lies ahead for 2019? There has only been one instance in the last 30 years (the Dot Com bubble burst and 9/11 period from 2000-2002) where the S&P 500 has had negative consecutive years, so if history is any guide, a positive market is in the forecast. So far, the markets are off to a good start. As of this writing, the S&P 500 is up just over 8% in the first 5 weeks of the year. We believe how the rest of the year goes will depend mostly upon three things: Does the US get a trade agreement with China? Does the Federal Reserve continue to raise rates this year, and if so, how many increases will they do? Finally, expectations are that the US and Global economies will slow this year. If that is the case, by how much? The answers to these questions will more likely than not dictate what kind of year 2019 turns out to be.
Tom Reynolds, CPA
Matt Reynolds CPA, CFP®
Gordon Shearer Jr., CFP®
Francis C. Thomas CPA, PFS
Jeff Hilliard, CFP®, CRPC
Robert T. Martin, CFA, CFP®
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)