Linda S. Parenti, CFA
President & Chief Investment Strategist
If you are thinking 2018 has been a rough ride for investors this year, you are not alone. The S&P 500 started out the year with remarkably strong gains in January merely to drop sharply just weeks later, reaching correction territory in early February. As a refresher, a correction is defined as a decline of 10% or more in the price of an index from its previous closing high. As the months progressed, equity indices continued to see an increasing number of large percentage moves in daily trading. Yet the S&P 500 still managed to reach another new, closing high in September. Unfortunately, it then delivered two more corrections, one in November and again just this past week. To put this into perspective, there have only been a total of seven corrections since the bull market started in March 2009. With three of those corrections occurring in this year alone, it has indeed been a tough time for stock investors.
Through all the swings year-to-date, the S&P 500 is positive by 1% if you include dividend income. Yet, besides for modest returns from cash, there have been no other asset classes to provide an offset. Returns have been much worse for international equities as well as many commodities on concerns of slower growth overseas and a strong dollar. Fixed income securities have not fared better either. Short term maturities are only fractionally positive, but those with longer maturities have negative returns due to the rising interest rate environment.
Why is all this occurring together? Markets have become fearful about slowing global growth and are looking for any signs of a possible recession ahead. Therefore, anything that might contribute to slower growth has become a chief focus. Top among these are the Federal Reserve’s forward path of rate hikes and the trade tensions with China. Both are reasonable concerns. Some progress with China relations has been made recently; and although a final deal is unlikely within the first quarter, the lowered tensions and increasing dialog are encouraging.
The Fed has been slowly raising rates since December 2015. It is largely anticipated the Fed will announce another rate hike on December 19. Interest rates likely do need to move a little higher to reach more normal levels, but economic growth could suffer if done too rapidly. I am hopeful that with their announcement, they will also reassure markets their plans for 2019 will continue to be data dependent and cautious.
Our economy remains quite healthy. Unemployment is low, wages are rising, the consumer is confident, inflation is reasonable, and leading economic indicators are still rising. If just a few of Wall Street’s major worries are reduced, we may yet see the traditional “Santa Claus” rally before year end.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.