Fourth Quarter Market Review
After several years of strong market growth, global equities came under pressure in the fourth quarter due to a host of factors. Equity markets found reasons to worry, as markets struggled with elevated trade tensions surrounding US-China tariffs and their associated economic impact. Fears of slowing global growth, talk of peak company profits, and end of year tax-loss selling added downward pressure. Federal Reserve Chairman Jerome Powell’s early October comments kick-started the downward momentum, as markets feared a more hawkish approach to rate increases, a potential over-reach by the Federal Reserve given on-going US balance sheet normalization and slowing growth.
These market headwinds caused growth and momentum stocks to head lower, led by technology (FAANG) stocks, coupled with cyclical sectors such as industrials, materials, and energy names. Developed international and emerging market stocks fared no better, due to similar concerns. Fading economic growth and oversupply concerns also caused oil to decline by nearly 40%, from around $70 a barrel to the mid-$40’s. Positive company earnings went unrewarded as stock prices reacted negatively to the quarterly noise.
US fixed income held its own this quarter in the face of another Federal Reserve rate hike. US fixed income was flat for the year, as the effects of higher interest rates put pressure on bond prices, while cash was the top performing asset class. According to Bank of America Merrill Lynch, the last time cash outperformed all major asset classes was 1992. However, after the effects of inflation, no major asset class provided a meaningful positive inflation-adjusted return, and in early December, Deutsche Bank reported that over 93% of all major asset classes had a negative return in US dollar terms.
Although 2018 was the first year since 2008 that global stocks declined, December’s stock performance was the worst on record since 1931. One could argue that a loss of 5% for US stocks and just under 10% for global stocks would not be an unexpected outcome given the bull market investors have experienced over the past decade. In fact, the re-rating of the stock market is healthy and now provides a lower bar for future corporate earnings, which we believe could be quite good for the next few quarters. Interest rates remain relatively low, corporations have liquidity to invest and buy back shares, and employment remains at historic highs. Indeed markets are bearing this out, as the first few weeks of 2019 have been positive for investors, recouping a good deal of what was lost in 2018.
Madison invests client assets for the long term, building globally-diversified portfolios designed to withstand quarters like we’ve just experienced. We thank our clients and friends for their trust and support as we head into what we hope will be a prosperous 2019.