Recent headlines would make you think the sky is falling (e.g., “Investors are officially panicking” ), and the stock market is oscillating wildly. One day it’s a record-breaking high, while the next is a record-breaking sell-off. This roller coaster of a market can really make your stomach drop if you let it.
Here are your index returns for year-end 2018:
|MSCI ACWI Ex US||-11.46||-14.20||4.48||0.68||6.57|
|US Aggregate Bond||1.64||0.01||2.06||2.52||3.48|
Overall, the stock market in the fourth quarter of 2018 ended down after large sell-offs. Some say this was an overdue market correction, while others argue a bear market is on the horizon. We think it’s too soon to say, but we do think that the volatility is far from over. We recommend that you brace yourself for 2019 to be more of the same.
Meanwhile, rates in the bond market are not much to write home about with the 10-year treasury rates falling precipitously. At the end of September, the 10-year Treasury was at 3.05%. By the end of December, it had fallen to 2.69% (a decline of nearly 12%). Further, yields on lower-rate treasuries began inverting. (An inversion has occurred when you can get a higher rate of interest on a bond that matures sooner than a longer one.) At the end of the year, a one-year treasury was at 2.63%, whereas a 5-year was at 2.51%.
In volatile times like these, a prudent investor looks at economic fundamentalsfor guidance. For example, the Fed raised interest rates to 2.5% in December. The Fed only increases rates when they ascertain a sound economy.After a decade-long period of monetary stimulus (via low rates) by the Fed in the aftermath of the Great Recession, the Fed is returning its monetary policies to a historically normal rate.With the rate changes, the market will react to different expectations on rate increases, including how many more increases will come in 2019. (The Fed expects to raise rates to 3% in 2019.)
With trade wars, large fiscal deficits and slowing growth in earnings, some want the Fed to pause on raising rates. On the other hand, fundamentals are strong in retail sales, unemployment, and wage growth. Fears of inflation have not panned out.(CPI had no change in November, after a 0.3% increase in October.) And the most recent jobs report was surprisingly positive. ("Companies add way more jobs than expected in December"). Profits have slowed, but continue to increase for US businesses. With these positive fundamentals, the Fed can return interest rates to normal, and we can expect continued volatility in the markets.