2018 was an interesting year in markets around the world. The market started strong in the first quarter, but natural ebbs and flows resulted in a bit of a rocky year, despite the good start.
Then, after US stock markets reached all-time highs on October 3, major indices fell nearly 20%. Thus, you may have heard the term “bear market” to describe stocks. “Bear Market” simply means a fall of 20% or more from a recent market high. A bear market effectively signals the end of a long “Bull Market,” which began in March of 20091.
In the first quarter, the United States imposed new tariffs on foreign goods2. Talks of a ‘trade war’ began to gain steam. In March, the Federal Reserve raised the federal-funds interest rate and signaled that another 2-3 such rates increased could be expected in 20183. Stocks ended the quarter modestly negative after their quick start.
By May, the US Unemployment Rate fell to an 18-year low4. However, there were signs that US consumer spending was cooling off and the European economy was slowing after fast expansion in 2017. US stocks were positive in the second quarter while international stocks saw modest declines.
In the third quarter, there were more mixed results than earlier in the year. Resignations amongst some key politicians in the U.K. threw some doubt into the outcome of the Brexit campaign5. The third bailout for Greece ended but the outlook for future growth was still in question6. Meanwhile, in the US, jobless claims were on the decline and consumer confidence hit an 18-year high7. The Federal Reserve raised rates again in September8. The US stock market increased over 7% while developed international markets increase slightly.
Stocks were broadly down in the fourth quarter by double digits, eroding any gains made previously in the year. The US stock market ended down for the year with their worst yearly loss since 2008. International stocks finished down over 14%. The global bond market stood as a bright spot returning just over 3%9.
So what does this mean? There were plenty of positive headlines from 2018, ranging from low unemployment to rising wages and surging corporate profits. Many analysts will attempt to explain what happened causing these declines in the stock market. Those explanations may make us feel more comfortable with what has happened and may make us think we should have been able to predict market declines.
The truth is, stocks can move in seemingly random and unpredictable ways. It is not uncommon to experience a pull back or “correction” every few years. We are reminded why diversification can be advantageous to an investor, as not every investment category was equally impacted by this market dip.
We have also seen in the past that markets can rebound quickly from declines. For instance, think back to 2009 on the tail end of the last major bear market. The S&P 500 returned over 50% from March through the end of 2009. It is important to stay on track and avoid decision making based heavily on recent market events or misleading headlines.
9 Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]).
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