2018 - Market Review; Wild ride & the return of the bears

As we enter 2019, I wanted to look back and review last year which will be surely remembered for a roller-coaster year in the markets. From soaring tax-cut optimism, to trade war turmoil, FED normalization disputes and the pits of the last few months, 2018 brought plenty of sensation.

Below, I list the stories which in my opinion were the most interesting in 2018 and had major effect on the market:

1. Implementation of tax cuts which lowered corporate rate to 21% that boosted the stock market
2. Trade war is on – On March 1st, President Trump announced steep tariffs on steel and aluminum that would take effect the following week. The market started its correction and the massive volatility began.
3. Fed raises interest rates as normalisation process starts. President Trump blames this policy as the reason why the markets are trading lower.
4. Following a horrible March when the Cambridge Analytica scandal emerged, Facebook faced another threat as stock price dropped by 20% following a decline in usage.

5. New EU/Japan trade agreement sends a powerful signal that two of the world’s biggest economies reject protectionism
6. The United States, Canada and Mexico reached an agreement to update the North American Free Trade Agreement (NAFTA) which will now be known as the USMCA (United States -Mexico – Canada Agreement).
7. Apple reaches $1trn of market cap, with Amazon to follow.
8. Risk of a contagion from Turkey spooks European Banks
9. Canada passed the cannabis legislation prompting a huge interest in marijuana stocks.
10. U.S. Economy continues to expand at a 3.5% pace in the third quarter

11. Third quarter massacre - Markets in the red. First signs of a bear market.
12. In the European Union front, BREXIT continues to haunt the market. The March deadline is 3 months away however uncertainty still looms as NO DEAL Brexit gains momentum.
13. Italian yield on the rise due to a dreadlock between the EU and Italy’s anti-establishment government.
14. Part of the U.S. Treasuries yield curve inverted for the first time in more than a decade. Inversion is normally the first signal that the economy is slowing down.
15. FAANGs Fear in Focus as death cross formed
16. The record-breaking bull market has been halted as several countries around the world enter bear market.

How did the markets perform?

Overall 2018 was very messy due to the various events unfolding and this gave rise to unprecedent volatility and more correlation between assets which traditionally are less likely to move with each other.

From a regional/macro equity standpoint, developed and emerging markets declined heavily alike. The best performing developed market was the US which declined 7% whilst the worst was Germany which declined 18%. From the EM side, the best performing market was Brazil, which was one of the few that ended the year positive with an increase of 15% following the elections whilst the worst was China with a heavy decline of 25%.

When looking at the equity sectors, the majority saw massive declines with Energy losing the most (-18%) due to oil price rout. The only sectors which generated positive returns where Utilities (+9%) and Healthcare (+3.4%) which are considered defensive.

Traditionally bond markets tend to perform when equities are under stress – this was not so much the case in 2018 due to several factors mainly the increase of the rates by the FED which pushes prices down while at the same time other major central banks were still in an accommodative stance. During the year, we have also seen corporates being downgraded from A to triple B bond which is just one notch above junk (or high yield). This is perceived as riskier as the high yield markets is more impacted by the oil price and as oil prices declined, we could see a wave of bond defaults.

Looking at performance figures, US investment grade bonds declined by 6% whilst High Yield declined by 7%.  Government bonds, which are the first to be affected by interest rate changes, also saw a decline however the decline was less felt by the short-term maturity as opposed to long term.

The US total bond market declined by 2.6% whilst when also taking into account international markets, these bonds have actually increased minimally by 0.13% due to the divergence in policy making by central banks outside the US.

Within the Commodities market, Gold also faced a wild ride. The price initially peaked in March but soon followed a free-fall to around $1200/oz due to a stronger Dollar and lower demand. During the last weeks of the year, the Gold started to rally again but has still closed the year with a negative 2.4%. Oil prices reached a high in October of more than $86 per barrel but has since plunged by more than 30% due to concerns of oversupply and global concerns.

As we all know, past returns are not always a guide to future results however it is always interesting to look at how asset classes and sectors have performed during the year and try to make sense out of these moves. By looking at this data we can analyse the trend and also try to catch up any undervalued markets which we might want to re-position our portfolio into.

 

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All returns are in local currency unless otherwise stated. Returns for bonds represent ETFs in that particular sector and are in USD.

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