Global stock markets seriously lost their footing in the final quarter of 2018. U.S. indices, most of which were sitting at record highs in August, gave up all of their gains and ended the year with losses. Foreign indices, which were already sitting on losses for the year, extended those losses. At the same time, real estate, commodity, and some corporate bond indices also declined during the quarter. Among broad indices, only high-quality bonds avoided losses, treading water for the quarter.
So, how bad was it? According to data from Bloomberg, this was very nearly the worst fourth quarter performance from stocks in the last thirty years, second only to that of 2008, in the midst of the financial crisis. And it was only the fifth time that the fourth quarter has been negative since 1987. December alone was the 11th worst month ever in the last 50 years, according to Morningstar.
The unusual performance for the quarter may reflect rising concern surrounding the lack of a trade deal with China. Many economists, including JP Morgan’s David Kelly, believe that tariffs and uncertainty surrounding trade are exacerbating the slowdown in China’s economy, the second-largest in the world after ours, now growing at its slowest pace in the past 28 years according to AP reports.
Politics may have contributed to the market decline as well. Even before the government shutdown went into effect, Democrats’ new majority in the House raised the risk of a prolonged impeachment fight and potentially put last year’s tax cuts, which contributed greatly to recent earnings growth, on the chopping block.
Whatever the reason, most market strategists, including those at Raymond James, think the selloff is overdone. Their argument rests on the fact that the economy is still growing, and is expected to continue growing. Leading economic indicators and the yield curve, two of the more historically accurate predictors of recession, are still positive. And while most strategists and economists believe that a prolonged trade war would likely be a drag on economic growth, nearly all agree that it wouldn’t be enough to cause a recession here on its own.
Of course there is also the government shutdown, now the longest in American history. While Raymond James’ Chief Economist, Scott Brown, points out that there is no precedent by which to gauge the full economic impact of a prolonged shutdown, the general consensus among economists, including Dr. Brown, is that it is unlikely to have a large impact on GDP growth, not to discount the negative impact it has on many individuals, including federal workers, federal aid recipients, or others that rely on a functioning government or federal programs.
Looking at historical drops of a magnitude similar to December’s, it has been a coin toss as to whether the market continues to decline in the subsequent months. Accordingly, longer-term investors have the opportunity to hold shares, and potentially accumulate additional shares, at more favorable prices today, even if it turns out not to be the absolute bottom of this downturn. However, we believe shorter-term investors should continue to maintain enough liquidity to ride out any additional turbulence.
Leading Economic Indicators are selected economic statistics that have been historically valuable as a group in estimating the direction and magnitude of economic change. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.
The information above represents the opinion of financial advisors Travis Rus, Michael Kernan, and Chris Winther, and is not necessarily that of RJFS or Raymond James. It is not a complete summary of all available data necessary for making an investment decision, and does not constitute a recommendation. Nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
