What Can We Learn from the 2018 Market and 2019 Forecast?

As we move into 2019, let’s review the last 12 months. Looking back over 2018, we saw market correction, which brings mixed expectations for this year. This uncertainty serves as a reminder to keep focused on your long-range goals, rather than the headlines of the day. Here’s what we saw in 2018.

2018 Overview

The 1st quarter of 2018 marked the return of volatility. While fundamentals remained intact, reduced confidence in the global economy and threats of a major correction drove capital markets down. This was further impacted by fears of a trade war with China.

U.S. markets moved up during the summer months, but international markets continued their decline amid heated tariff discussions, doubts about the success of Brexit, and geopolitical concerns in emerging markets. The 2nd quarter was the start of “S&P 500” envy, as U.S. stocks outperformed most of the international developed and emerging markets.

The story didn’t change much in the 3rd quarter, but we did see a significant uptick in volatility. U.S. markets continued to lead the pack, while international developed markets recovered some of their losses from earlier in the year. Meanwhile, the U.S. and global bond markets remained relatively unchanged.

In the final quarter of 2018, interest rate and growth fears, along with geopolitical events, sparked further volatility in the financial markets and reversed many of the U.S. stock gains earlier in the year. The S&P 500 posted a loss of about 6.2% for 2018. After falling into bear market territory, defined as a drop of more than 20% from recent highs, the tech-heavy NASDAQ was down 3.9% for the year overall. International stocks, excluding the U.S., realized about a 14% loss for the year. The U.S. bond market ended the year flat, while global bonds, excluding the U.S., were up 3% for the year.

2019 Concerns

What lies ahead? In contrast to last year’s consensus on harmonized economic growth, expectations for 2019 are mixed. Politics and continued uncertainty will drive more volatility. Here are some of the specific risks that have sparked market volatility, along with insights for 2019:

  • Trade talks — The de-escalating tensions are a good sign, but we are not out of the woods. Washington and Beijing have exchanged complaints and are working on a long-term solution. There is a March deadline to agree to a plan.
  • Equity performance — U.S. equities are expected to recover from the Q4 2018 decline, but are not expected to reach the record highs seen recently. International equities are still expected to outperform U.S. equities and should be included in a diversified portfolio.
  • Bond yields — Monetary policy in the U.S. and abroad should continue to tighten, which will likely cause higher yields. Short-term, conservative bond investments are favored over long-term or high-yield fixed income.
  • U.S. Economy — Despite market performance, forecasts suggest the U.S. entered 2019 in a strong position. The U.S. economy may slow in 2019, but will likely still expand, which would mark the longest economic expansion in our history.
  • Government shutdown — Politics will cause volatility, but overreacting to short-term distractions and declines means you won’t be in the position to take advantage of growth on a recovery.

What Can You Do?

The sharp declines toward the end of 2018 had investors shell-shocked, but it’s important to maintain some perspective. The recent correction was preceded by the longest bull market in history and reflects the waning growth expectations. A shift in market structure also played a role, with an increase in algorithmic trading, which capitalizes on volatility to turn short-term profits.

Times of uncertainty and volatility put discipline to the test and are the best times to ensure your goals and risk tolerance are in line with your investment and financial plan. This is also the best time to remain diversified to maximize the probability of participating in a recovery across asset classes. As we have said many times, no one can reliably and indefinitely forecast a market’s performance. A long-term focused and globally diversified portfolio will improve your odds of success and help mitigate the impacts of short-term volatility and market distractions.

It’s not easy to ignore the headlines, and we don’t expect anyone to do so. However, we do believe that focusing on what you can control improves your chances of success. This means ensuring your portfolio is aligned to your risk and goals, and is constructed of sound advice. Contact us today to speak with an advisor if you have any questions.

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