Global equity markets, led by the US, took a nosedive in the 4th quarter after peaking on September 20, 2018. Traders have been ignoring the strong economic and corporate earnings environment, choosing instead to worry about the still unresolved trade tensions between the US and China and the Federal Reserve’s apparent resolve to remain on the path of raising interest rates to a “neutral” level. Fears that these issues, along with weakening economies in Europe and China, could rapidly derail the US economy are driving the equity market decline.
The US bond markets’ initial response to the stock market reversal in late September was not positive, and investors had no place to hide as they watched prices fall across both asset classes through most of the fourth quarter before the US Treasury market rallied in December.
The NASDAQ 100 Index and the Russell 2000 Index of small company stocks, which had led the market higher through the summer months, officially crossed into bear mark territory ahead of the S&P 500 index, which came within 0.22% of the bear market threshold at the market close on Christmas Eve before recovering some ground in post-holiday trading.
Financial markets are forward-looking, and they clearly suspect that storm clouds could be on the horizon for the economy. Time will tell whether or not the market is crying wolf, but that will be of little comfort to investors when they open their year-end 401(k) statements. Data suggests the economy remains strong, US corporate earnings are surging, yet the stock market stinks. If this seems strange, it is not unprecedented. Though rare, bear markets have occurred in the absence of economic recessions. In each such instance, the severity and duration of the market decline was significantly lower than for bear markets occurring during recessions.
By the numbers, as of the market close on December 31st the S&P 500 Index lost 4.38% in 2018. The technology-heavy Nasdaq 100 Index suffered a stunning reversal, closing out 2018 down 2.86%, erasing a year-to-date gain that had reached 17.47% as recently as August 29th. Unlike the US market, international stock indices spent virtually all year in the red, with the MSCI ACWI ex USA index falling 14.20% in 2018. US and global bond prices declined across the board in 2018, with the Bloomberg Barclays US Aggregate Bond Index eking out a 0.01% return, attributable entirely to interest payments.
It’s impossible to know when Mr. Market’s mood swings will subside, but as a client of Compass Financial, you can always be assured that we are paying attention and working diligently to protect and grow your assets so that you can focus on the things that matter most in life to you.
Regulatory Disclosure:
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The MSCI US Broad Market Index captures broad US equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, representing about 99% of the US equity universe.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.