December to remember: A fitting end to a volatile 2018

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management


Given what we’ve seen in 2018, would you have expected anything less than a roller coaster ride to close out the year? In many ways, December was a microcosm of the year as a whole—replete with conflicting economic signals, political disruption, and, of course, head-spinning volatility. With the Federal Reserve hiking short-term interest rates for the fourth time in 2018, investors fretted over the prospect of higher interest rates and a potential global economic slowdown in 2019—even as the US economy expanded and unemployment dipped to a 49-year low.

US equities

US equity performance, Decemberr 2018

Source: FactSet Research Systems

Stocks began the month on track for their worst December since the Great Depression; only a late-month surge prevented a dance with ignominy. Over a six-day period through December 24, the Dow Jones Industrial Average fell a cumulative 1,883 points, while the S&P 500 Index was off roughly 20% from its peak in late September through December 26 before rebounding. Small caps and technology stocks also sustained heavy losses. A partial government shutdown didn’t help matters, nor did a simmering trade dispute with China and presidential tweets aimed at Federal Reserve Chairman Jerome Powell.

Financials and energy stocks were especially weak performers in December, with energy shares hurt by excess crude oil supply and financials hampered by a flattening Treasury yield curve and narrowing net interest margins.

Sector performance, December 2018

Source: FactSet Research Systems

International equities  

International equities fared better than US stocks, although both developed and emerging market shares were down for the month—and the year. European stocks briefly fell to their lowest level since 2016, battered by flagging energy shares, earnings disappointments within the pharmaceutical industry, and an uncertain plan for Britain’s formal exit from the European Union in 2019.

In Asia, stocks fell amid deteriorating economic fundamentals in China. Continuing a year-long pattern of ups and downs, emerging market stocks again lost ground following a promising November. In particular, commodity-dependent exporters were hurt by falling energy prices and a strong US dollar.

International equity performance, December 2018

Source: FactSet Research Systems

Fixed income

After raising the federal funds rate by 0.25% in December, the Federal Reserve helped trigger a flight to quality that pushed the 10-year Treasury yield to 2.68%–a sharp reversal from November, when the 10-year Treasury yield peaked at 3.25%. In keeping with the flattening yield curve, longer-dated Treasuries were the best fixed income performers during the month.

Fixed income performance, December 2018

Source: FactSet Research Systems

Outlook for 2019

As we close out an eventful year in the financial markets, here are five key themes to keep an eye on in 2019.

1. Global growth

Investors will be monitoring economic indicators closely in 2019 for any signs of an economic slowdown. Although most of the world’s major economies are still on solid ground, tariffs and trade wars threaten to undermine economic growth across the globe.

2. US politics

A dispute over funding for a border wall with Mexico led to a partial government shutdown in late December that continued into the new year. While investors don’t appear to be overly spooked by public sector paralysis, they will be looking for an eventual resolution from a politically divided Congress.

3. The Federal Reserve and monetary policy

At its policy meeting in December, the Federal Reserve signaled that it will increase interest rates two more times in 2019. That’s down from the three hikes previously telegraphed by the Fed but is still more than the market anticipated, which led to some volatility. Given recent rumblings from the White House, there are now questions about whether Fed Chair Powell will survive long enough to enact his plans.              

4. Bond markets

Shorter-term Treasuries provided some stability from equity market volatility throughout much of 2018. High-quality bonds could again benefit if volatility continues, while higher rates could provide investors with additional yield opportunities in 2019. Given the relatively flat yield curve, short-term credits could be especially attractive given their limited sensitivity to rising rates.

5. Equity market leadership

Growth stocks have outpaced value stocks by a wide margin in recent years, but small caps and value strategies could rebound as investors place more emphasis on relative valuations and company fundamentals. International stocks have had a tough go of it, but their valuations could make for a compelling entry point for investors. There are opportunities for investors in US large caps, too, with the forward price-to-earnings multiple for the S&P 500 Index at its lowest point in five years.

The bottom line

With equites whipsawing on a near daily basis, it can be easy to forget that US unemployment is at a near 50-year low, inflation is contained, and the economy continues to grow at a healthy clip.

The markets are no longer enjoying sustained tailwinds, which could bolster the importance of individual stock selection over the coming year. In addition, asset classes are becoming increasingly uncorrelated, which has important implications for diversification. Regardless of market conditions, investors can best position themselves by maintaining a long-term focus and diversifying across a wide range of asset classes.

Thanks for reading, and best wishes for a happy and prosperous new year. 


Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC


Additional contributor:

Andrew Cohen, CFA

Director, Investment Strategy

E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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