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Market Year in Review

By: Ted Black, CFP©
Winter 2019 (Vol. 36, No. 4)

As investors, it’s only natural to hope that the financial markets and our investment portfolios will perform well each and every year. However, as experienced long-termers we know that unfortunately that’s just not how things work. Although the financial markets have produced enviable returns over long periods, from time to time they remind us that to reap those favorable returns, we must maintain our long-term focus and be patient through the tough times.

2018 saw the return of volatility to the stock markets. The markets had a rough start to the year, but then as March came to a close they got back to business and put in a solid performance for the next 6 months or so. Then in early October, the Bears took and held onto control through the remainder of the year. All in all, it was a challenging year for investors. As compared to some previous market pull backs, the declines we experienced weren’t dramatic, but they were widespread. All of the major domestic stock market indexes … the Dow Jones Industrial Average®, S&P 500® (large cap), S&P 400® (mid cap), S&P 600® (small cap), and the technology heavy NASDAQ® Composite … were in the red for the year.

There are occasions in which other areas of the market or globe produce positive returns despite what happens in the U.S. stock market. However, that wasn’t the case in 2018. With rising interest rates here at home creating headwinds for bonds, the Bloomberg Barclays U.S. Aggregate Bond Index® (the go-to benchmark for measuring the performance of investment grade U.S. Bonds) was essentially breakeven for the year. As a whole, both European and Asian markets were down. Oil finished the year lower than it started, as did Gold. When it was all said and done, 2018 just didn’t offer much for investors.

What was the cause of this widespread lackluster performance? Absent a clear catalyst such as the financial meltdown of 2008 or a horrific geopolitical event, it’s difficult to pinpoint any one item that might be responsible for poor market performance. With that said, I believe rising interest rates here in the U.S. and the trade/tariff war between the world’s two largest economies deserve much of the credit.

October saw the start of the market decline here in the U.S. that gathered momentum through the recent bottom in late December. The financial markets had made it clear that they thought the U.S. economy was due to slowdown in 2019 and that the Federal Reserve Board (The Fed) should act accordingly and stop raising rates. The Fed saw it differently, indicating that there was no evidence of a slowdown and in mid-December raised rates for the fourth time in 2018.

Until recently, The Fed had indicated that there was likely to be two more interest rate increases in 2019. However, they have since softened their stance on additional rate hikes this year, suggesting that they would be willing to take a more “wait and see” approach.

The next likely item that influenced market performance last year is the trade war between the U.S. and China. It was widely believed that in the short to mid-term this standoff would hurt China’s economy more than ours, and that appears to be the case so far. However, without a resolution to their differences, it’s clear that the effects will be global in nature. With the U.S. and China agreeing to a 90 day “cease fire” late last year, it’s my guess that both parties recognize it’s in their best interest to reach an agreement, and that some type of resolution will be forthcoming.

It’s difficult to know what the financial markets have in store for us as we move forward. What we do know is that building a portfolio of suitable, high quality, low cost investments and maintaining a long-term focus has proven to be a rewarding strategy for investors.

If you questions about how your current situation might be affected, please feel free to call Ted Black, CFP® at 888-878-0001, extension 3.

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.