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Investors broke records, both to the upside and downside, amid a holiday-shortened week, one that is usually is defined with terms like “quiet session” and “muted trading.” NOT THIS YEAR! On Christmas Eve, stocks tanked to their lowest levels of the year, before mercifully closing at 1:00pm. Just as Santa was readying the sleigh, the Dow and S&P 500 were both in danger of joining the NASDAQ in bear-market territory, defined as a 20 percent decline from an asset’s 52-week high.
When markets reopened on December 26th, investors staged a massive rally, pushing up the major U.S. stocks indexes by 5-6 percent (the Dow rose 1,086 points, its biggest single-day point gain ever). The Boxing Day rally was record breaking and marked the biggest daily percentage move higher for the Dow, the S&P 500 and the NASDAQ Composite since March 23, 2009 (just two weeks after the bear market bottom). By the end of the volatile week, stocks snapped a three-week losing streak and narrowed year to date losses.
With just one trading session left in the year, it’s time to take a deep breath, look back and learn eight important lessons from 2018.
1. The Market is not the Economy…and Vice Versa: Although 2018 is set to be the worst year for stock investors since 2008, the U.S. economy was strong. The economic expansion (the second longest in U.S. history) got a big boost from the new tax law and by a surge in government spending. The combination likely increased GDP by about three percent in 2018, which would be the best showing since 2005. Meanwhile, stock prices peaked in the late summer, but as soon as investors began looking ahead, they were concerned that the effects of the corporate tax cuts were waning, overall growth was downshifting and interest rates were increasing.
2. Year of Corrections and Bears: After a relatively placid couple of years, investors endured two corrections in 2018, defined as a drop of ten percent or more. But the damage was worse for small companies and tech shares, driving down the Russell 2000, the NASDAQ Composite and the once vaunted FAANGs (Facebook, Apple, Amazon, Netflix and Google parent, Alphabet), into a bear market. Also taking a dive: crude oil, which peaked in October, government bond prices and Bitcoin, which dropped below $3,200 in December after rising above $19,000 a year ago.
3. Diversification Works, but not always: Almost every asset class moved in tandem (and in the wrong direction) in 2018, prompting some to proclaim “Diversification doesn’t work!” The point of asset allocation and diversification is that when one investment zigs, another zags. While there are years when the tried and true strategy does not work (see: 2008 and 2015), over time it has been the best bet for long-term investors. One way to see why is to examine the period from 2000 to 2010, which included the financial crisis.
During that volatile decade, the annualized return of the S&P 500, including dividends, was just a paltry 1.4 percent per year. During those ten years, a portfolio of 60 percent equities (split among different types of stocks) and 40 percent fixed income had an annualized return of 7.83 percent. The numbers make the case for diversification.
4. The Federal Reserve Still Matters…A LOT: Citing strong economic growth, the Fed hiked short-term interest rates by a quarter of a percent four times in 2018, increasing the benchmark rate to a range of 2.25 to 2.5 percent. Critics, including the President, worry that the central bank’s “autopilot” policy will slow down the economy and bring the era of easy money to an abrupt conclusion. Investors seemed particularly spooked when rumors swirled that Trump was seeking to fire Fed Chair Jerome Powell.
5. Trade/Tariffs: The Trump Administration enacted a number of tariffs in 2018: 10 percent on imported aluminum; 25 percent on imported steel; 25 percent on $50 billion worth of Chinese industrial goods; and 10 percent on another $200 billion of Chinese consumer goods. Additionally, the U.S., Canada and Mexico signed the United States-Mexico-Canada Agreement (“USMCA” or “NAFTA 2.0”), which will require companies to use more locally produced steel and also to pay auto workers at least $16 per hour.
6. The Labor Market is not Done Yet: The economy added just over 200,000 jobs per month, on average, the unemployment rate dropped to 49-year low of 3.7 percent, the broader rate fell and wages finally began to perk up, especially for lower income earners. While the pace of hiring could slow in 2019, it should remain strong enough to keep the unemployment rate low.
7. (Some) Retail is Dead: RIP Toys R Us, which put Geoffrey the Giraffe out of a job and Sears, once the largest retailer in the U.S., filed for bankruptcy protection. At the same time, Amazon held a beauty contest for its second headquarters and captures almost half of all online sales, according to eMarketer. Brick and mortar giants Walmart and Target spent a lot to eat away at some of Amazon’s dominance, but still remain far behind the Everything Store.
8. Your Identity is STILL Not Safe: A year after the Equifax data breach, hotel operator Marriott said that hackers have been stealing information from its Starwood subsidiaries reservation systems for almost four years. The breach, one of the largest in history, exposed information of up to 500 million customers and was yet another reminder that the onus is still on consumers to mind their identities.