On Christmas Eve, the S&P 500 Index fell more than 20% from the historical high reached in September, which technically should have ended the longest bull market in U.S. history. The dive is attributed to a grim global growth outlook, in addition to continued interest rate hikes from the U.S. Federal Reserve (Fed). As seen in this week’s chart, the S&P 500 Index finished 2018 down by 6%; however, the rest of the world fared even worse. Developed international and emerging markets were down 16% and 17%, respectively.
For the majority of 2018, the U.S. equity market was buoyant. Tailwinds from tax reform and easy financial conditions lifted the S&P 500 Index almost 10%. Meanwhile, the rest of the world was not able to keep pace. When the S&P 500 Index reached its historical high, the MSCI EAFE Index and the MSCI Emerging Markets Index dropped 3% and 10% on the year, respectively. Developed countries’ issues included decelerating growth and political uncertainties; whereas, emerging markets fell victim to rising dollar interest rates and more restrictive U.S. trade policies. The discrepancy between the U.S. and the rest of the world is so remarkable that people can’t help asking when the gap will close, and whether others will catch up or the U.S. will slow down.
This chart provides some insight into the questions. On Dec. 24, 2018, the S&P 500 Index was down 15% for the month. There had not been a worse month on record since the global financial crisis. However, on Dec. 26, 2018, the S&P 500 Index rallied 5%, and the Dow Jones Industrial Average Index posted the largest points gain for a single day in history. I guess Santa Claus always delivers.
For 2019, I would pay close attention to the evolution of the following topics:
- The Fed: It hiked interest rates four times in 2018. Although the Fed acknowledged that it takes time for the monetary tightening to affect the economy, it seems determined to walk the up-sloping interest rate path. Markets would appreciate any capitulation from the Fed.
- U.S.-China Trade War: I do not expect any material progress from the ongoing negotiation; however, I see strong reasons for both sides to prolong the truce.
- Brexit: It has been a long and painful journey for the U.K. government. Parliament will vote on the negotiated deal in January. If that deal is struck down, the best outcome would be the U.K. remaining in the EU through a second referendum. The worst scenario would be a chaotic no-deal Brexit.
- China’s Growth: China is projected to account for more than 25% of the world’s economic growth for the next few years – enough said.
In 2018, global stock markets did not perform well. The U.S. and the rest of the world diverged and then started converging. In 2019, I expect the trend to continue. Markets may be significantly influenced by a slew of geopolitical and economic events unfolding. If the U.S. and China economies both disappoint, then despite their unwillingness to stand by each other, they will hand- in- hand take the entire world with them. To conclude, I wish everyone a Happy New Year and good luck trading in 2019!
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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