What a change from year-end to today! Following a dismal global stock market performance in December 2018, to-date has seen a strong rebound. At this writing, the S&P 500 has climbed over 11% since January 1, and international and emerging market stocks are closely following.
The rebound has been led in part by comments from the US Federal Reserve indicating they will be patient with future interest rate hikes, as well as continuing robust corporate earnings and a sense the global trade tensions (particularly with China) may be easing.
But looking back, the fourth quarter of 2018 saw some of the poorest returns across US equity indexes in recent memory. The Russell 2000 Index (small companies) declined over 20% while the S&P 500 lost 13.5%. International markets were also hit as the MSCI World ex US Index fell 12.8% and the MSCI EM dropped 7.5%.
As noted above, the Federal Open Market Committee kept upward pressure on interest rates during 2018, capping that with a December rate hike where the key Fed Funds Target Rate was raised by 0.25% to 2.25% – 2.50%, the highest rate in over 10 years. Due to the positive economic growth, the FOMC raised their future GDP growth projections to 2.3% in 2019 and 2.0% in 2020.
While continued economic growth is certainly good news, this has led to pressure on interest rates. The 10-year Treasury ended the year with a yield of 2.68%, up from less than 1% just a few short years ago. Crude oil prices closed the quarter at $45.81, posting the first annual loss since 2015. Gold closed the quarter at roughly $1,284.70—a 1.5% drop from the start of 2018. Regular gasoline fell sharply, closing the quarter at $2.32 vs. $2.84 for the previous quarter end.
US job growth has been a significant bright spot. In January 2019, nonfarm payrolls increased by a larger-than-expected 304,000 following a December number of 312,000, and an average 2018 quarterly gain of 254,000. In 2018, a total of 2.6 million new jobs were created while the unemployment rate fell from 4.1% to 3.9%. Wage growth averaged 3.2% for the year.
Worries about slowing growth persist, however, as the Institute for Supply Management Manufacturing Index declined by 5.4 points to 54.1 in December—the largest one-month decline in 10 years. While readings above 50 are an indication of economic expansion, respondents to the survey show concern about slowing growth and the impact of tariffs. US housing and new construction data likewise remains tepid.
Inflation remains tame. The core Consumer Price Index rose by 21 basis points in November to 2.18% year-over-year, while the core Personal Consumption Expenditures index increased 15 basis points month-over-month to 1.88% year-over-year. Inflation numbers should be softer in the first part of 2019 as lower crude oil prices are reflected in these two indexes.
As always, please call us to address your questions, and make sure to apprise your advisor of any changes to your financial situation.