This was the year the long, seemingly endless bull market came to a crashing halt–and U.S. investors finally, for the first time since 2008, experienced the normal definition of a bear market (down 20% from the S&P 500’s all-time high on September 20). The bottom fell out in the final month of the year, which started with a decent chance of another year of overall annual gains, and ended in disappointment.
Looking back, it was a strange investment year in many respects. First, the markets endured two major beatings–from late January to early February, and again from early October and especially through December. Christmas eve notched the worst market drop on record in terms of actual dollars. The S&P 500 index registered the worst December performance since 1931. This will be the first time since 1948 that the S&P 500 index rose in the first three quarters and then finished the year in the red.
Meanwhile, for unlucky investors in cryptocurrency Bitcoins, the year’s investment news may have rivaled the crashing of the famous Dutch Tulip craze. The entirely-made-up currency, backed by no government or pool of assets, dropped from a high of $20,000 per “coin” down to $3,800.
A breakdown shows that just about every investment asset dropped in 2018. Looking at large cap US stocks, measured by the S&P 500 index, lost 13.97% during the year’s final quarter and overall finished down 6.24% in calendar year 2018. The pain was even greater for international investors. The broad-based EAFE index of companies in developed foreign economies lost 12.86% in the final quarter, and ended the year down 16.14% in dollar terms. In the bond markets, yields have risen incrementally with the rising interest rate environment, however the price of bonds have gone down (bond prices have an inverse relationship to the interest rate cycle). The result was a net negative return for most bonds in 2018.
Basically, if you were an investor, you lost money last year. But that also, of course, provides you with a chance to buy investments at discounted prices in the new year.
Many investment professionals had been expecting a bear market much sooner than this. Bear markets tend to occur about every 3.5 years, and there have been 32 of them since 1900.
Longer-term, a recession may be the biggest concern. There are increasing signs that many factories are suffering from the uncertainty around U.S. trade policy, including tariffs on imported steel, aluminum and about $250 billion of Chinese products. At the same time, consumer confidence has fallen to its lowest level since July, and a measure of the employment outlook experienced the biggest plunge in 41 years.
Nevertheless, by all measures, the U.S. economy is still growing, and nobody can predict whether the markets will recover in 2019 or experience a steeper decline. All we know is that, historically, all bear markets in history have been temporary phenomena, and that investors who rebalance their portfolios on a regular basis–that is, buying stocks when their percentages of the total have gone down–tend to do better than investors who don’t rebalance, and especially better than the many who lose their nerve and sell in a panic during the downturn.
Also remember volatility does not only have one side. The first seven trading days of 2019 have brought a 3.6% rise as measured by the S&P 500.
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