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As with all markets the cycle continues, 2018 brought back market volatility, by the end of December the broad indexes ended the year with returns ranging from 0.01% to minus 14.20%. Cash was the lone asset delivering a measurable positive return. For 2019 it appears volatility could be more prevalent than in prior years. The most recent data reports for our U.S. economy, indicated as the Gross Domestic Product ("GDP") expanded at a 3.5 percent annualized rate in the 3rd Quarter of 2018, that was unchanged from its estimate and well above the economy's growth potential, which economists estimate to be about 2 percent. US growth is being driven by the White House's $1.5 trillion tax cut package, which has given consumer spending a jolt and bolstered business investment.1 The 2018 GDP growth did not however translate to positive market returns. In 2018 the major asset class results were: Stocks: the benchmark S&P 500 index achieved a total return, with dividends reinvested, of minus 4.38%. Bonds: Bloomberg Barclays US Aggregate Index 0.01%. The broader market’s technology-based NASDAQ Composite index's total return returned a minus 3.88% and the measure of the world markets, the MSCI All Country World ex USA Index declined 14.20%.2
2018 proved to be a paradoxical year, as investors were confronted with a range of contradictions: Unemployment ended the year at nearly a 50-year low and wages have been rising, yet investor's fears of a recession have increased.3 Corporate earnings were markedly strong while stock prices sank sharply into correction territory by the end of the year. Investors are now left to question whether solid fundamentals or growing uncertainty will steer the markets. Ironically, 2018 was relatively calm until the fourth quarter. Outside of a brief correction in January and February driven by the fear of rising interest rates, investors focused on an accelerating economy and strong earnings growth from most domestic companies.
So, what happened over the last three months? Stocks appeared to have reached higher than sustainable levels by the end of the summer, so it wasn’t surprising to experience a long overdue correction. Our belief is there were two impacting reasons for the current sell off. First was a genuine fundamental issue of higher interest rates and inflation. Second, consider a long list of investor worries: concerns over slowing economic and earnings growth and trade issues are the most prominent, but investors are also worried about global struggles i.e. Brexit, the Italian budget stalemate, the dramatic fall in world oil prices, political turmoil and dysfunction and the uncertainty in Federal Reserve policy.
We have no crystal ball, but we do believe, it is more likely than not, the U.S. will avoid a recession in 2019. We don’t see any real reasons that make a solid case for recession. The consumer sector continues to remain strong, particularly the labor market. The corporate sector continues to be sound, although corporate management teams are continuing to evaluate trade concerns. And the government sector, while experiencing a partial shutdown appears to be expanding, as spending is likely to rise. We do expect to experience slower growth as compared to 2018, but still above historical trends at greater than 2% annually.
As we enter the new year, we are cautiously optimistic that stocks will return positive results in 2019 but investors should always be anticipating the normal corrections of 10% or more. During any market downturn period it is often hard to be more like those few investors, among them Warren Buffett and his business partner Charles Munger, who have long-term thinking built into them by nature. The rest of us have to cultivate it slowly and it is often difficult to "get going" (stay
invested or invest more) when the going "gets tough", by analyzing our personal behavior during past market declines and, above all, by cultivating good habits and mental toughness. This process includes choosing what to ignore — turning off constant market news updates, tuning out the talking heads telling us the markets are doomed — all of this is critical to maintaining a long-term focus and staying the course.
Diversification across asset classes remains important because truly no one ever knows which asset class will be the winner this next year. And diversification traditionally assists in reducing any impact of major market swings on your portfolio. Keep in mind, diversification doesn't eliminate risk, and there is no guarantee against investment loss but it is an important approach to reduce large swings in value, in either direction, from the different asset classes and in doing so, assists in reducing investors downside loss. Always remember, you can time the market, just not all the time and therein lies the problem. If you can't take market's volatility and have difficulty with negative market return periods, maybe you shouldn't be invested in market sensitive assets. Think about it and let us know if you want to make a change in your investment strategy.
1 CNBC "US third-quarter GDP growth unrevised at 3.5%" 11/28/18
2 Capital Group
3 Think Advisor 6/29/18