The month of December did not go as investors would have hoped. Unlike most December’s past, the equity markets set aside the “Santa Clause Rally” and settled for the worst December performance since the 1930s. International equities, while still down, performed relatively better than U.S. stock indices. Commodities continued this second half slide, shedding more than 6% for the month. The dollar ended the year strong, as did the Barclay’s Aggregate Bond Index, which strengthen enough for the month to end the year slightly positive.
U.S. & International Stock Index Returns
|Index Decenber 2018 Year-to-Date|
|Dow Industrials (8.86%) (5.55%)|
|S&P 500 (9.41%) (6.18%)|
|S&P 400 (Midcap) (11.21%) (12.36%)|
|S&P 600 (Small Cap) (12.55%) (9.70%)|
|MSCI World (8.08%) (11.03%)|
|MSCI EAFE (4.67%) (16.43%)|
|Bloomberg Agg. Bond 0.02%|
|CRB Commodity Index (12.49%)|
|US Dollar Index 5.35%|
All data as of 12/31/2018, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
December can only be described as a disaster for US equities as all the major indices we follow lost more than 8 ½ percent for the month. There are many reasons one can attribute the selloff to – higher interest rates, geopolitics, trade issues, Federal government shutdown, future corporate earnings growth concerns. Yet one big reason not mentioned by the talking heads is that all good things must come to an end at some point.
The average bull market since 1854 has been 40 months in length. As we enter the new year the bull market that began in March 2009, we are facing the very real possibility it has ended after 114 months. What we need to see is if this is a brief correction that cleanses the market or a more serious turndown.
As we enter 2019 the equity markets are in what appears to be a simple correction as both Chart #1 and Chart #2 make plain for all to see. While no one knows what will happen in the coming weeks/months, we do know that the market has technically broken down in the month of December. Best-case scenario would be that the Dow and S&P 500 hold above their respective December lows. If that does not happen, we would expect the major averages to find support at the levels indicated in their respective charts.
December was a big month for the bond market as the Aggregate Bond Index firmed up and into a slight gain for the calendar year. This show of strength, even as The Federal Reserve increased short-term rates again in December, appears to be real. Could yields rebound in the coming weeks? Absolutely. But with the breakdown in the 10-year Treasury (Chart #3) being so strong we would expect more strength in bond prices and lower yields in the coming months.
The dollar began to strengthen in April 2018 as a reaction to the threats of tariffs for goods imported from China by President Trump. For the month of December, the US Dollar Index closed below 96, the first sign of any weakness since September. More importantly the index ended the year below its technically important 50 day moving average. It would be easy to predict a weakening dollar, but one shouldn’t be fooled by the charts in this case. Where the dollar is headed next has more to do with US-China trade negotiations. If things stay the same or get worse the dollar should remain strong. A settlement or truce should result in a lower dollar. What happens in the next two months is anybody’s guess.
The breakdown in commodity prices from the June highs continued to accelerate into the end of the year with the CRB index ending the year below 170.
As we do every year, we will be publishing our thoughts and concerns on the upcoming year. What started out as another promising year for equities in January ended as the worst year for investors since 2008. Such a turn of events would have been unthinkable to many – and still is – given the strength of the economy in both 2017 and 2018, record corporate earnings on blowout numbers, historically low unemployment, and a major tax cut for both individuals and corporations. As we enter a new year the current valuation for equities appear to be at reasonable levels … yet here we are.
In November we turned cautious on the equity markets. That caution has turned into concern. Just as the seasons change so do the direction of the markets. As we enter 2019 the big question we face is: have we entered 2019 at the start of a new bear market or are we simply in the middle of a price correction?
On behalf of Magellan Financial we would like to wish all of our friends, family, clients and readers a wonderful holiday season. And if you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
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