Across the board, it was an extremely difficult year to make money in the financial markets. U.S. and global stocks dropped sharply in the last quarter, capping a year marked by turbulence and losses across most asset classes. Among investors’ worries are signs of a global economic slowdown, exacerbated by ongoing Federal Reserve monetary tightening, U.S.-China trade tensions, and political uncertainties in Europe (Brexit, Italy) and the United States.
After tumbling 7% in October and then stabilizing in November, U.S. stocks fell again in December as investors reacted negatively to the Fed’s language surrounding its 25-basis-point rate hike. While the Fed’s updated forecast implied one fewer rate hike in 2019 than previously communicated, Fed chair Jerome Powell gave no indication it would ease up on its balance sheet reduction program, nor that a pause in rate hikes was imminent. The markets interpreted this as a more dovish Fed, but not dovish enough for their liking.
Larger-cap U.S. stocks dropped 9% in December and fell 13.6% for the quarter (its worst quarter in seven years). For the year, U.S. stocks were down a more modest 4.5%. The negative year broke the S&P 500’s remarkable nine-year run of positive returns. Smaller-cap U.S. stocks fell more sharply, losing 20% in the fourth quarter and 11% for the year (iShares Russell 2000 ETF). Foreign stocks struggled as well, with developed international markets and emerging markets both down 14.8% (Vanguard FTSE Developed Markets ETF and Vanguard FTSE Emerging Markets ETF).
Core bonds, which typically perform well when stocks do poorly, had losses through November. But a strong rally in Treasury bonds in December resulted in a flat return for the year. Only U.S. Treasury Bills (T-Bills) had a return above 1%.
The contrast with 2017’s strong market results is also striking—and serves as a useful reminder of the unpredictability of markets. It was only a year ago that we were reporting 25% to 30%-plus returns for international and EM stocks. U.S. stocks were tallying 20%-plus gains, and market volatility was at a historical low.
Overall, it was a very challenging year for globally diversified portfolios, led by sharp declines in international and emerging stock markets. U.S. equity growth-oriented managers were a small bright spot of positive returns. Value-oriented managers struggled, though, continuing a multiyear trend. We do not believe this divergence is sustainable. We believe that like most market cycles, this one will turn again (but the precise timing is uncertain and unknowable).
Although January has proved to be a nice bounce back month, no one knows what 2019 will bring. We may see some continuation of recent market trends or a stabilization or reversal in some of them. The market consensus will undoubtedly be surprised again. The only certainty is the lack of certainty. But, what we are confident about is our investment approach.
Throughout our 25-plus year history, we’ve emphasized the importance of having a long-term perspective in becoming a successful investor. With a long-term perspective comes the necessity of discipline (sticking to your investment process and executing it consistently over time) and patience (the temperament to allow your investment objectives to be realized over time and not be overly sensitive to shorter-term price volatility). We believe this is exactly what’s necessary to achieve long-term success and avoid the pitfalls of performance chasing and emotionally driven investing.
As always, we appreciate your confidence and trust, and we wish everyone a happy and healthy New Year.
Joel Isaacson & Co., LLC