2018 Q4 Quarterly Update

The markets gave us a reminder these past few months that they can and do decline, sometimes with little warning and astonishing rapidity. After more than nine years of fairly consistent upward movement, all major stock indices were in the red for both the fourth quarter and the year. Some of the popular indices whipsawed wildly back and forth along the way – at times approaching or crossing the 20% threshold that is typically used to define a bear market – before recovering some of the ground lost. The MSCI All Country World Index, a barometer for the global stock universe across 23 developed and 24 emerging market countries, retreated -12.65% for the quarter and -8.93% for the year. Closer to home, the Dow Jones Industrial Average registered a loss of -11.31% for the last three months of 2018 and -3.48% for the year overall; the broader S&P 500 exhibited a similar pattern of returns (-13.52% and -4.38%, respectively). Shares in smaller companies fell further; the Russell 2000 Index declined -20.20% over the fourth quarter, and ended 2018 down -11.01% for the year. Foreign markets, on the whole, reacted more negatively as 2018 drew to a close, with losses exaggerated once returns were translated back to stronger US dollars: the MSCI Europe, Australasia and Far East Index gave up -10.54% in local currencies and -13.36% for the full 12-month period. Emerging markets retrenched -9.73% in local terms and -14.25% in USD over 2018.

Bonds were the primary source of refuge. As interest rates continued to rise, the short end of the government fixed income spectrum was 2018’s best performer: 30-day Treasury Bills produced 1.81%. The broader US-denominated bond market, however, barely eked out a positive return from January to December: 0.01% as measured by the Bloomberg Barclays Aggregate Bond Market Index. Globally, the positive annual return of 1.10% to sovereign bonds in their local currencies translated into a loss of -0.84% in US dollars, according to the FTSE World Government Bond Index.

Two phenomena are noteworthy at such times as these. First is a widespread foreboding that bad times are at hand. Second is that the press frames events to exacerbate that anxiety.

It is a well-established fact that investors are more averse to losses than they are pleased by gains of equal or even greater amounts. But everyone wants to earn real returns. The inescapable truth: to earn a real return, you must be prepared to withstand periods of negative investment results. It is impossible to earn returns in excess of inflation over the long run without incurring downside risk. Were it not for that risk, an investor could not expect a commensurate reward. This is a fundamental principle of investment, and if you have been working with us for a while you will have heard mention of it many times. As long as you remain an investor, it is a notion you will do well to bear in mind.

That all sounds pretty dire. But, let’s compare intra-year declines to the S&P 500 Stock Index (excluding dividends) from 1980 – 2018 with the return for each full calendar year. The chart below shows that there was not a single year during that period wherein the S&P 500 did not show a loss at some point. Yet the Index ended 29 of 39 years with a positive return.

The take away here is twofold: 1) the stock market will almost certainly decline in value at some point during any calendar year; and, 2) in most years (historically, 74% of the time) the market will recover and post a positive return by year-end.

We hope this example will encourage you the next time the news reports imply that the end is near, or whenever your portfolio value experiences an interim decline.


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