Sellwood’s January 2019 Market Snapshot is available for download.
Fourth Quarter 2018: The Bull Gets Trampled
The bull market that began in early 2009 finally lost its legs in the fourth quarter. The S&P 500 fell nearly 20% from September highs, finishing the full year in the red for the first time since 2008. Misery loves company, and markets in 46 out of the 47 countries classified as developed or emerging by MSCI declined in the year. The average country posted a 15% decline while the one outlier, Qatar, posted a 25% gain. While the magnitude of equity market drawdowns is significant, it is important to note that it comes on the back of broad market advances. Even after the correction, the S&P 500 is back to where it was just 15 months earlier in September 2017.
The Federal Reserve hiked rates four times in 2018, lifting the top range of the federal funds rate to 2.5%, and official projections show two to three rate hikes in the coming year. The markets, however, are skeptical and have priced in only a 10% chance that the FOMC hikes rates again in this cycle. Fed Chair Powell, like his predecessor Janet Yellen, is learning on the job about how best to communicate the rationale for future rate decisions, a job further complicated by President Trump’s public criticism of the latest tightening. The confusion over future rates and political uncertainty pushed long-term Treasury yields lower in the fourth quarter, flattening the yield curve. 10-year Treasurys offer only 30 basis points of incremental yield compared to 2-year bonds.
Traditional diversifying assets didn’t provide much relief for investors for the year as commodities and global real estate declined on growing global growth and trade war concerns. Oil dropped significantly as crude prices once again dipped below $50 a barrel. The decline in commodity prices has helped to drag market-based inflation expectations and inflation-protected Treasurys lower as well.
In the spirit of the holiday season, every year Sellwood Consulting celebrates a local charity.
This year, we made a donation on behalf of our clients to Community Vision, one of Oregon’s largest providers of individualized support for people with disabilities. Community Vision’s mission is to make Oregon a place where people with disabilities can live, work, and thrive in the communities of their choice.
Our staff also joined Community Vision for a “Volunteer Work Party.” While there, we made cookies with several of Community Vision’s self-advocates, and we were treated to a personal show by DJ Lamar, Portland’s best DJ.
We are honored that our financial support and engagement will help individuals with disabilities achieve independence.
Third Quarter 2018: The Only Game in Town
The bull market that began in early 2009 is now the longest on record in the United States, surpassing all previous expansions in length (if not in total gain). The continued rally this quarter was a microcosm for 2018 as a whole: U.S. equities were strongly positive, while diversifying asset classes posted negligible returns. Investors have continued to prefer technology and faster-growing companies, with the S&P 500 Growth Index returning 9.3% in the quarter versus the 5.9% posted by the S&P 500 Value Index. Apple made history as it became the first company with a trillion-dollar market capitalization, a feat that Amazon was quick to follow.
U.S. equity has been the only game in town; returns for other major assets have disappointed. A continued trade war has pushed the US dollar upward, harming both international markets and their returns to U.S. investors. Emerging markets, many of which depend on debt issued in U.S. dollars, suffered the most. In September, President Trump announced another round of tariffs on Chinese goods and threatened that he was ready to impose additional levies on the remaining $270 billion of goods currently imported from China should the Chinese government take retaliatory action. The Trump Administration was also able to come to agreement for a possible update to the North American Free Trade Agreement with Canada and Mexico.
Domestic economic growth has been strong, and GDP and employment numbers continue to grow. Even still, real wages have been flat as inflation is starting to eat away at nominal gains. Given that backdrop, it was not surprising to see the Federal Reserve raise rates, with another increase expected before the end of the year. Long-term rates have moved up only slowly compared to shorter-term rates and the result is an increasingly flat yield curve. Most types of bonds posted flat returns in the quarter.
Last Friday, members of Sellwood’s team spent the afternoon volunteering at Free Geek, a local nonprofit devoted to transforming technology into opportunity. By our estimation, we took apart 25 desktop computers, 10 ancient servers, and dozens of modems, reducing obsolete technology to its component parts, so that they could be responsibly recycled.
Free Geek’s mission is “to sustainably reuse technology, enable digital access, and provide education to create a community that empowers people to realize their potential.” We are proud to be part of that community.
We are a competitive bunch. If we had to declare winners of the event, they would be:
- Ruthie, for deconstructing the most computers (15);
- Charlie, for total weight recycled (hundreds of pounds); and
- Nick, for sheer volume of devices pulled apart (countless modems and power cords)
Thanks to Free Geek for hosting us.
Second Quarter 2018: Tit for Tat
Tit-for-tat trade retaliation took center stage during the second quarter. Canada levied retaliatory tariffs on wide variety of US agricultural products in response to steel and aluminum tariffs announced by the Trump administration in March. China likewise promised to retaliate along the same lines. As the quarter ended, President Trump raised the possibility of escalating the conflict with 20% tariffs on imported European automobiles, a move which EU Officials were quick to condemn.
Italian political turmoil roiled international markets as a new government raised the possibility of Italy exiting the European Union. Italian equity markets sold off sharply while bond yields rose, pushing Spanish and Portuguese yields higher, reminiscent of past European debt crises. The trade and politic turmoil pulled developed international equity prices downward in the quarter, with European financials heavily impacted. Emerging market stocks were also heavily hit. Causes ranged from NAFTA trade worries in Mexico, growth problems in Brazil, to continual political problems in Turkey.
Despite trade woes, US stocks were up across the board for the quarter, with REITs and small cap names leading the way. In a familiar refrain, growth stocks outperformed their value counterparts. Returns for growth names have been so strong that over the past ten years growth has outperformed value by over 3% annualized. However, over the past 15 years, value has provided almost 2% of outperformance above growth indices.
The US labor market continued to strengthen as employers voiced concerns about the lack of quality job applicants. However, wage growth remains elusive and consumer spending is beginning to slow. In good news for renters, there has been a large increase in multifamily inventory, slowing rent increases in major markets. The Federal Reserve raised rates in June as its primary inflation measure hit its target. In an interesting reversal, after years of hawkish positioning from Republican policy makers, Trump economic advisor Larry Kudlow warned the Federal Reserve about blunting current economic growth by raising interest rates too quickly.