4Q 2018 Market Summary
The fourth quarter of 2018 marked one of the most challenging and volatile investment environments since the 2008 global financial crisis. The S&P 500 Index declined 13.5% during 4Q, resulting in a 4.4% decline for the year. This 2018 decline marks the first calendar-year decline for the Index since 2008, when the S&P 500 Index plunged 37%. While difficult to pinpoint a root cause for this recent sell-off, it’s clear that investors are concerned over a global economic slowdown following almost a decade of economic expansion.
The 4Q sell-off was broad-based across almost all sectors. The energy sector declined 24% as oil prices dropped. The technology and industrial sectors each declined just over 17% during the quarter, while the consumer discretionary and communications sectors (including many social media firms) both dropped just over 15%. Financials also declined 13.1% during the quarter. Sectors that outperformed the S&P 500 Index on a relative basis during the quarter included historically defensive industries like consumer staples (down 4.9%), healthcare (down 8.7%), real estate (down 3.8%), and utilities (up 1.4%). The relative outperformance of these defensive industries also helped value-focused strategies outperform growth strategies. The Russell 1000 Value Index dropped 11.7% during 4Q compared to a 15.9% decline for the Russell 1000 Growth Index.
Small cap stocks, which rallied for most of the year on the back of tax cuts, fell 20.2% during the quarter. Non-U.S. stocks struggled almost all year and those struggles continued during the quarter. The MSCI EAFE Index, which tracks foreign developed markets, dropped 12.5% and the MSCI Emerging Markets Index fell 7.5% during the quarter.
The Federal Reserve raised their key Fed Funds rate in December 2018 for the ninth time since 2015, now targeting a range between 2.25% - 2.50%. One-year Treasury rates increased .04% during the quarter to 2.6%, however most other rates across the yield curve fell during the same time period, as investors fled equities for the safety of bonds. For example, 10-year Treasury rates peaked at 3.2% in November before falling to 2.7% to close the year. Similarly, 30-year Treasury rates declined from 3.2% to 3.0% at the end of the quarter.
Falling interest rates helped bond prices during the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index returned a positive 1.6% during the quarter and effectively broke even for the full year. The corporate bond market did not fare as well. The Bloomberg Barclays U.S. Corporate Bond Index fell 0.2% during the quarter, while high yield bonds, measured by the Bloomberg Barclays U.S. Corporate High Yield Index, dropped 4.5%. The Bloomberg Barclays Municipal Bond Index generated a positive return of 1.7% during the quarter.
Commodity prices also struggled during 4Q. The Bloomberg Commodity Index fell 9.4% during the quarter as oil prices fell from $75 to $44 for a barrel of West Texas Intermediate oil. The LBMA Gold Price Index rallied 7.7% during the quarter.