2018 Financial Market Year in Review
January 4, 2019
Two thousand eighteen was perhaps the strangest year we’ve experienced in our careers. Most importantly, it was one of the truly great years in the history of the American economy, and by far the best one since the global financial crisis 10 years ago. Paradoxically, it was also a year in which the equity market could not get out of its own way.
It is almost impossible to cite all the major metrics of the economy which blazed ahead in 2018. Worker productivity, which is the long-run key to economic growth and a higher standard of living, surged. Wage growth accelerated in response to a rapidly falling unemployment rate. Household net worth rose above $100 trillion for the first time, yet household debt relative to net worth remained historically low. Finally—and to SC&H Financial Advisors this sums up the entire remarkable year—for the first time in American history, the number of open job listings exceeded the number of people seeking employment.
Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%. Cash dividends set a new record; indeed, total cash returned to shareholders from dividends and share repurchases since the trough of the Great Panic reached $7 trillion.
But the equity market had other things on its mind. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674—probably somewhat ahead of itself, as it seemed to be discounting the entire future effect of corporate tax cuts in one gulp. There ensued in February a 10% correction, followed by several months of consolidation. The advance resumed as summer waned, with the Index reaching a new all-time high of 2,931 in late September. It then went into a brutal decline, falling to the threshold of bear market territory: S&P 2,351 on Christmas Eve, off 19.8% from the September high. A rally in the last week of trading carried it back up to 2,507, but that still represented a solid six percent decline on the year, ignoring dividends. Two thousand eighteen thus became the tenth year of the last 39 (beginning with 1980) in which the Index closed lower than where it began. At the long-term historical rate of one down year in four, that’s actually just par for the course.
The major economic and market unknown as the year turns is trade policy, which in the larger sense is an inquiry into the mind of our President. We think it fair to say, as the economist Scott Grannis recently did, that “Trump has managed to reduce tax and regulatory burdens in impressive fashion, but his tweets and his tariff threats have created unnecessary distractions and unfortunate uncertainties, not to mention higher prices for an array of imported consumer goods.”
These and other uncertainties—perhaps chief among them Fed policy and an aging expansion—were weighing heavily on investor psychology as the year drew to a close. For whatever it may be worth, our experience has been that negative investor sentiment—and the resulting equity price weakness—have usually presented the patient, disciplined long-term investor with enhanced opportunity. As the wise and witty Sage of Omaha wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”
In closing, it is worth restating, even in the context of a resource primarily focused on the year just past, our overall philosophy of investment advice. It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven. Every successful investor we’ve ever known was acting continuously on a plan; failed investors, in our experience, get that way by reacting to current events in the economy and the markets.
The SC&H Financial Advisors team is here to help see that your plan remains on track through all of the unsettling events that have occurred and are sure to continue to occur. We consider ourselves fortunate to have that trust bestowed upon us and work hard each and every day to put our clients in the best possible position for a successful outcome of your plan.
Advisory Services offered through SC&H Financial Advisors, Inc. SC&H Financial Advisors, Inc. is a wholly owned subsidiary of SC&H Group, Inc.
These materials have been prepared by SC&H Financial Advisors for informational purposes and does not constitute or form part of, and should not be construed as, an offer to sell or issue, a solicitation of any offer to buy, or a recommendation with respect to, any securities and should not be relied upon as investment advice. The views expressed are subject to change. Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. Past performance is not a guarantee of future results.
This communication serves to provide certain opinions on current market conditions and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.