Q4 2018 Market Performance and 2019 Outlook
Q4 Market Performance
In the fourth quarter of 2018, global equities fell 13% and on Christmas day were down 20% from the high last January. The US was hit hardest, especially high momentum tech stocks.
On the positive side, unemployment hovers around all-time lows, profits are at all-time highs and growing, and inflation remains in check. On the other hand, the housing market is softening in terms of volume and price and oil prices have plummeted.
For investors with more equally weighted sectors, it came as good news that defensive sectors like Utilities and Consumer Staples outperformed this quarter. In addition, bonds were up a little which also mitigated losses in equities . For the most part, investors with diversified portfolios fared better than those who had continued to bet on tech and other popular equity sectors.
Overall, while it was a challenging year for investors with no major asset classes producing meaningful gains.
With US-China tensions, an uncertain interest rate environment, and some big losses in the tech sector, the past few months have left investors wondering: what’s next?
For 2019 in general, our outlook is balanced. If anything, declines make stocks attractive than they were a few months ago. Valuations are now mixed. The forward price to earnings on the S&P 500 looks compelling compared to current interest rates but based on other metrics like price to sales and overall equity values compared to GDP stocks remain expensive.
There’s no way to know where markets will go from here in 2019, but investors should remember that periods like we experienced in the fourth quarter of 2018 are a normal part of how stocks move higher over full cycles.
What to make of the recent market volatility?
The recent correction, which came very close to the technical definition of a bear market, has made many more fearful of the market, but from a valuation perspective stocks are now cheaper than they were in the summer months.
Eventually, the bull market will end. The interest rate environment has become a bigger headwind, as has trade conflict and the escalating turmoil around Brexit.
Q4 Sector Performance – Utilities Come Out on Top
Here’s an interesting fact — utilities had the second lowest average daily change among sectors but the biggest average daily variance from the market overall. When stocks were down, utilities were often up, but when stocks were up a lot, utilities usually weren’t.
Incidentally, they were also the second-best performing sector of the year and the only sector that was positive in the fourth quarter Utilities are not as exciting to think about or invest in compared to tech leaders like Amazon. In fact, in the U.S., all utilities combined have roughly the same value as Amazon. But that doesn’t mean they should be ignored.
From a risk management perspective, low correlation to the market makes utilities a valuable part of the tool kit for diversification and portfolio construction. But we don’t have a favorite sector. In fact, we anticipate all sectors should perform about the same over very long periods of time. We expect to benefit from disciplined rebalancing, not bets or timing.
We continue to grow and enhance our services for you and look forward to providing clarity and confidence to your financial lives as we progress through 2019. If you have any questions about the market or your portfolio, please feel free to contact our advisors.