Market Commentary: Fourth Quarter

Market Commentary Q4 2018

2018 is a wrap. In a year where we had the World Cup, the Winter Olympics, an election, restructured trade deals, and many other events, people are still very interested in their investments, making money, and achieving their financial goals. According to Google Trends: the most searched “what is…?” was “Bitcoin.” Number seven for “How to..?” was “How to buy Bitcoin.” Number three in that category was “How to play Mega Millions.” The number one search for “Who…?” was “Who won Mega Millions?” In the US, “World Cup” was the top searched item. It doesn’t surprise me that sports would be number one. It also doesn’t really surprise me that the Mega Millions results (#7) beat the Election results (#10). With all of that said, according to Gallup, 46% of non-retirees in the U.S. say they will not have enough money in their retirement.

When stock markets decline, many investors wonder if they have a sound strategy and the right investments. Losing money creates a much stronger emotional response than making money, and that emotional response creates a desire for action. The rebalancing strategy we subscribe to is empirically sound. When investments decline relative to other investments, we purchase more. When investments increase relative to other investments, we sell. This buy low, sell high strategy makes sense after the emotion is removed. We also subscribe to a globally diversified portfolio. Some years – like in 2017 – foreign stocks outperformed those of the U.S. In 2018, we saw the opposite. Sometimes the trend lasts longer than a year, and investors start to question their strategy. Trends can last a long time, only to change very quickly. Over the last few years, large U.S. companies have outperformed small U.S. companies. Should we change our strategy? Are large companies going to outperform small forever? We don’t think so. We believe foreign and small companies are good for the portfolio, just like eating vegetables are good for the body.

For the market recap, the fourth quarter of 2018 started in a downward direction right from the beginning, and then got worse at the end. We saw another 1,000 point move in the Dow Jones Industrial Average, this time it was a positive move, and if it wasn’t for that day, the year end results would have been worse than they were. The quarterly performance of the S&P 500 Index was -13.52%, of which resulted in a negative year end return of -4.38%. The foreign markets, represented by the Europe, Australia, Far East Index (EAFE), faired slightly better for the quarter with a return of -12.54%, but it’s earlier year performance had not been as good as that of theU.S., resulting in a year end return of -13.79%. Small companies represented by the Russell 2000 Index were down -20.20% for the quarter, and -11.01% for the year. 

The Federal Reserve increased the federal funds rate another ¼ of a percent to a range of 2.25% -2.50%. This was the fourth increase in 2018, and the outlook for 2019 possibly includes two more interest rate increases. The Bloomberg Barclays US Government Credit 1-5 Index was positive 1.46% for the quarter and 1.38% for the year.

We take our investment responsibilities seriously because we are interested in helping you achieve your goals. It is impossible to know the direction of the markets over the next quarter or year, but we do know that a globally diversified portfolio strategy has helped our clients retire comfortably. Thank you for entrusting us to help you achieve your financial goals. We wish you peace, prosperity, and positive performance in 2019!