New Year Market Update - 2018 Year in Review

“If everybody is thinking alike, then somebody isn’t thinking” – General George S. Patton, Jr.

Every January, it’s customary to look back at the year that was. What were the highlights? What were the “lowlights”? What were the events we’ll always remember? Most importantly, what did we learn? When we review 2018, it’s possible to draw very different conclusions. If you were to Google “2018 year in review in the markets”, you’d find wildly varying opinions from analysts, pundits, bankers, economists, and others. They’re all reviewing the same year – but their interpretations tend to be very different. Here’s why.

The Markets: It was a volatile year for the markets. The Dow[i], S&P 500[ii], and Nasdaq[iii] all ended the year lower than they started – the first time that’s happened since 2008. The S&P and Nasdaq are in or near bear market territory, and the Dow had its worst December since the Great Depression. What’s interesting to remember, though, is that the markets spent most of 2018 climbing rather than falling. The Dow soared to never-before-seen heights, and at one point, the Nasdaq was up 17.5% for the year! The first half of the year saw dramatic peaks and valleys, too. The markets shot out of the gate in January after the new tax law went into effect, but then quickly plunged in February. The same pattern occurred in March and April. What caused all this volatility? To answer that, let’s look at:

The Economy: It’s a fact often forgotten by politicians and pundits, but the markets and the economy are not the same thing. While the markets ended the year on a down note, the overall economy soared in 2018. Observe these numbers:

Those numbers paint a picture of a strong economy – a picture that drove the markets to great heights earlier in the year, as I just mentioned. But it’s a picture that doesn’t tell the whole story – which is that the economy is likely slowing down. The economic expansion has been driven for years by historically low interest rates – rates the Federal Reserve continues to raise. This, in turn, has affected the housing market and the stock market. Oil prices have plummeted, too, which is good for consumers at the gas pump, but bad for the energy industry. Meanwhile, many of the world’s largest economies are also slowing down, especially in China and Europe. In this ever-more connected global economy we all participate in, that spells trouble. While good economic numbers cited above helped propel the markets, all these concerns helped bring it down to earth again. And if these trends continue, 2019 could bring even more market volatility.

The Future: That said, a slower economy is not the same thing as a stagnant economy. There is talk of rising rates but rates are still relatively low. Corporate profits remain steady, consumer spending is thriving, as is the labor market. These are all indicators of a healthy economy in 2019, even if it’s not quite producing at the same pace it was before. On the other hand, there’s a ceasefire in the trade war with China and there are is chatter of a resolution coming soon. As of this writing, the federal government is experiencing another shutdown. Furthermore, a large portion of the economy’s growth over the last decade has been prompted by fiscal stimulus from the government – stimulus that will be harder and harder to provide as the nation’s deficit climbs and climbs. Take away that prop, and what happens to growth? The fact is, investors often tend to be both irrational and impatient – a volatile combination. While the economy may be technically strong, trends are what anxious investors pay attention to. And if the economy looks like it’s trending down, it’s quite possible the markets will follow.

The Takeaway: While the overall story for 2018 was decidedly negative, the final days of December and the first few days of 2019 have provided some cause for optimism. Technical indicators like The Bullish Percent for the NYSE and the Bullish Percent for the S&P 500, which each measure the percentage of stocks within their respective universes that are on Point & Figure buy signals, have each reversed up from near-historic lows, indicating that we have begun to see demand return to the market. Similarly, the NYSE High Low Index, which measures the percentage of stocks on the New York Stock Exchange hitting new 52-week highs vs. those hitting new 52-week highs and lows, has also begun to climb after reaching extremely washed out levels, also indicating that the US equity market may have found its footing. In short, the extremely oversold conditions we witnessed at the end of 2018 have reversed and many of the losses have been regained in the last few weeks.

As always, we will continue to monitor your portfolios and make any necessary changes as leadership changes within the market.  If you would like to become more familiar with my investment process and the tools I use to identify market leadership across major asset classes and within asset classes, please contact me at your convenience. Whatever 2019 has in store, rest assured there will be both obstacles to avoid and opportunities to seize. But whatever happens, we here at Carlson Asset Management will continue analyzing all the facts and data to help you make smart, unbiased, unemotional financial decisions – both this year and beyond. As always, please let me know if there is anything I can do for you in 2019.

Sincerely,

Bruce Carlson, CFP®
President
Carlson Asset Management