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Market Commentary

January 2019

Civista Wealth Management Logo
Frank P. Sudal, CFP®, CFA
Trust Investment Management

Total Returns (%) as of December 31, 2018

Fixed Income 1 Mo 3 Mo 1 Yr 3 Yrs 5 Yrs 10 Yrs
U.S Aggregate 1.84 1.64 0.01 2.06 2.52 3.48
High Yield -2.14 -4.53 -2.08 7.23 3.83 11.12
Global 2.54 1.31 -1.82 3.32 0.28 1.27

U.S. Large Cap -9.03 -13.52 -4.38 9.26 8.49 13.12
U.S. Small Cap -11.88 -20.20 -11.01 7.36 4.41 11.97
Developed International -4.85 -12.54 -13.79 2.87 0.53 6.32
Emerging Markets -2.66 -7.47 -14.58 9.25 1.65 8.02
Source: Morningstar.  U.S. Aggregate - BBgBarc US Agg Bond.  High Yield - BBgBarc US Corporate High Yield.  Global - FTSE WGBI NonUSD.  U.S. Large Cap - S&P 500.  U.S. Small Cap - Russell 2000.  Developed International - MSCI EAFE.  Emerging Markets - MSCI EM.

U.S. Equity Markets wrapped up the year with a steep increase in volatility, surprising many investors, as it was the worst December since 1931. 2018 began with robust returns, boosted by tax cuts and deregulation, but sentiment soured in the end, with concerns in monetary policy, trade disputes, and a partial government shutdown. In December, the S&P 500 declined 9.03%, ending the year down 4.38%. 

International Equities also struggled throughout 2018. China showed signs of a slowing economy, exacerbated by trade tensions with the United States and a strengthening dollar. Brexit negotiations remained uncertain as the United Kingdom moved closer to its scheduled departure from the European Union in March 2019.  Both the developed and emerging market indices declined in December (4.85% and 2.66% respectively) and ended the year with negative returns (13.79% and 14.58% respectively).

Bond Markets experienced low to negative returns as interest rates rose. The U.S. Aggregate bond index outperformed equities with an increase of 1.84% in December and a small but positive 0.01% return for the year. High yield bonds did not fare as well, with credit spreads widening due to concerns of a slowing economy.

Rising Interest Rates, and the Fed’s hiking pace, caused investor concern throughout the year and impacted the market decline. The Federal Reserve raised rates by 0.25% three times (March, June, and December), for a total of 9 hikes in the last 3 years. Although the Fed signaled two more rate hikes in 2019, there is a 70% probability they will not occur, according to CME Group’s FedWatch Tool. Concerns over the Treasury yield curve also contributed to uncertainty. Historically, when the yield curve inverts, a recession follows in 12-18 months. While some parts of the yield curve have inverted (2 and 5 year), investors should focus on the gap between the 2 and 10 year yields, which is still flat. When short-term rates move higher than long-term rates, the market suggests rates are too high and the Fed is pressing the economy’s brakes too quickly.

Our Outlook for 2019 does not include an economic recession. Domestically, consumers drive the majority of U.S. GDP growth, and they are continuing to spend. The labor market and corporate fundamentals are strong. Valuations have also improved, thanks (a lot) to the market decline. Inflation remains tepid and the Fed has become more dovish. The Organization for Economic Cooperation and Development (OECD) growth forecasts that global GDP will expand by 3.5% in 2019. Key risks to our outlook include interest rates and a prolonged trade dispute with China.