The Markets in 2018

Trade wars, midterm elections, and market volatility were hallmarks of 2018. In an attempt to reduce the trade deficit, the U.S. Administration pushed to rewrite trade agreements with several long-time trade partners. The White House amended the trade agreement with South Korea, imposed tariffs worldwide on steel and aluminum, and renegotiated the North American Free Trade Agreement (now the United States-Mexico-Canada Agreement). But the most impactful was the trade war with China, not only on the countries directly involved, but on much of the global economy. Reciprocal tariffs were imposed by all large-economy countries throughout the year. There was a temporary truce following the Group of 20 summit, but no definitive agreement was reached.

Elections in November showed a politically divided nation, no surprise to most. Democrats picked up 40 congressional seats to win control of the House of Representatives for the first time since 2011. But Republicans maintained control of the Senate. The federal government shut down in late December over a budgetary stalemate between the President and Congress, principally over funding for a border wall.

For the year, the stock markets reached new highs and then gave it all up and more by the end of December, thus “tumultuous” was the main word for the markets in 2018. Trade wars continued, the Federal Reserve hiked interest rates, oil prices dropped, and long-term bond prices rose. The Chicago Board Options Exchange Volatility Index (VIX), a measure of market risk and investor sentiments, spiked in February, was relatively stable through much of the summer, then in December jumped again. Equities were sold, bought, and sold again in rapid order, causing benchmark indexes to post noteworthy gains and losses on an almost daily basis. As a result, we rode a roller coaster of stock prices throughout the year.

The year had some positive highlights. The economy expanded at an annual rate exceeding 3.0% for the first time in several years. The unemployment rate hit a low mark. The Federal Reserve raised interest rates, based on the strength of the economy and labor market, four times during the year. Consumer income rose and purchases increased.

The Markets

  • Equities: The year may mark the end of what was nearly a 10-year bull run. January was a good month; February and March were not. Then growth in equities picked up steam, with record highs in several indexes during the summer. But by October, investor concerns about the impact of a trade war was enough to prompt sell-offs, sending stock prices lower. November was a little better, and then December proved to be volatile. Ultimately, the benchmark indexes did not even match their 2017 year-end values. In fact, several indexes suffered their worst annual losses in many years.
  • Compared to 2017, the Russell 2000 Index, which had eclipsed its 2017 closing mark by more than 13% in September, ended the year down 12%. The Global Dow was not far behind, falling more than 11% by the end of December. The large caps of the Dow and S&P 500 Indexes ended the year down 5.6% and 6.2%, respectively. The Nasdaq, which led the way for much of the year on the strength of tech stocks, dropped almost 4% below where it started the year.
  • Bonds: As stock prices rose during the first half of 2018 ,interest rates moved incrementally higher and the demand for long-term bonds was low. Yields on 10-year Treasuries rose almost 30 basis points in January as bond prices fell. Long-term bond yields continued to climb, reaching 3.0% in July. However, as volatility increased for stocks, the demand drove prices higher, pushing down the yield on long-term bonds. Ultimately, the yield on the benchmark 10-year Treasuries closed 2018 at 2.68%, up only slightly from the 2017 closing yield of 2.41%.
  • Oil:Oil prices began 2018 at over $60 per barrel and continued pushing higher through January, reaching almost $70 per barrel in May. But fears of overproduction began pushing oil prices lower in November. Prices continued to drop, hitting a low of nearly $42 per barrel in mid-December. Oil prices closed 2018 at $45.81 per barrel, their first annual loss since 2015. As oil prices rose and fell, so did prices at the pump. Retail regular gasoline prices closed the year at $2.32 per gallon on December 24, about $0.151 less than a year ago.
  • FOMC/interest rates:The Federal Open Market Committee raised interest rates four times during 2018. Each time it increased the target range by 25 basis points. The first increase was in March, followed by one in June, September, and then December. For the year, the target range increased 100 basis points, from 1.25%-1.50% to 2.25%-2.50%. The Committee said it expected the labor market to remain strong and the economy to continue to expand, while noting that private business investment was slowing, but it changed its stance by the end of the year and reduced its forecast from four rate increases in 2019 to two 25-basis-point rate increases in 2019.
  • Currencies:The dollar maintained a relatively strong position throughout much of 2018. The Wall Street Journal Dollar Index, which measures the U.S. dollar against the currencies of 16 other countries, closed 2018 at $89.67, up from its 2017 year-end mark of $85.98. Another currency index, the ICE U.S. Dollar Index, which measures the dollar relative to a basket of six foreign currencies, closed 2018 about 4.5% higher — its best annual gain in several years.
  • Gold:Through the first quarter of 2018, gold stayed at about $1,350 per troy ounce. Rising interest rates, favorable stock market returns, and a strong dollar pushed gold prices lower during the summer. However, as stock prices faltered, gold prices pushed closer to their early-year values, closing 2018 at $1,284.70.

Eye on the Year Ahead

The economy did grow in 2018. Will it continue to grow in 2019? Fears of an economic slowdown that have lingered over the last year or so could be realized in 2019. The housing market hasn’t picked up the pace and is generally lagging behind other economic mainstreams. And with inflation inching up, economic stimulus could ease and lead to tighter financial conditions moving ahead. Certainly if the global trade wars between the U.S. and China continue, not only would the impact be felt domestically, but it would be felt by all global economies and markets as well. As 2018 closes and 2019 begins, the federal government remains shut down.

Data sources: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/ Market Data (oil spot price, WTI Cushing, OK); (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indexes are unmanaged and are not available for direct investment.

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