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2018 Economic Review

In this 2018 recap: a strong economy, a volatile year for equities and commodities, a trade battle between the U.S. and China, a gradual path upward for the federal funds rate, and slower growth overseas.

Provided by: Nate Lewis

THE YEAR IN BRIEF

Investors will remember 2018 as a year of significant ups and downs. Wall Street ended the year on a down note, with the fourth quarter leaving the S&P 500 in the red: the index retreated 6.24% in 2018. The Federal Reserve made a series of quarter-point interest rate hikes, the United States and China imposed a series of tariffs on each other’s imports, and new questions emerged about the Brexit. On the bright side, the U.S. economy featured low unemployment and steady consumer spending, a major North American trade pact took a big step forward, and home sales picked up in the fall.1

DOMESTIC ECONOMIC HEALTH

Data on the state of the economy was largely encouraging during 2018, and the Federal Reserve responded to it with four quarter-point interest rate increases, the last coming in December. The federal funds rate was in a target range of 2.25-2.5% when the year ended. The central bank did adjust its dot-plot forecast by December, projecting two rate hikes in 2019 instead of three; it believes the economy will expand 2.3% this year. The federal government’s official GDP readings for the first three quarters of the year: 2.2%, 4.2%, and 3.4%.2,3

Personal spending, as measured by the Bureau of Economic Analysis, increased in 10 of the 11 months ending in November. In those ten months, the average gain was 0.4%. Retail sales were up 5.3% YTD through November compared with 2017, according to the Department of Commerce.4,5

Households felt good about the way the economy was going. The Conference Board’s consumer confidence index started the year at a very high 124.3, climbed to a spectacular 137.9 in October, then finished 2018 at 128.1, up 4.1% year-over-year. Ending 2018 at 98.3, the University of Michigan’s consumer sentiment index rose 2.5% across 2018, with a mean 98.4 reading for the year (the best average reading for the gauge since 2000).6,7

By August, Department of Labor data showed that there were more job openings in America than unemployed people available to fill them. The unemployment rate fell from 4.1% in January to 3.7% in September, a 49-year low. It has been below 4.0% since July.8,9

Yearly inflation more or less rode a bell curve during 2018. In January, the Consumer Price Index showed a 2.1% year-over-year advance; that gain reached 2.9% in both June and July, then declined to 2.2% by November. (The Producer Price Index displayed a 2.5% annual rise in November, down from 2.9% in October.)10,11

The twin purchasing manager indices maintained by the Arizona-based Institute for Supply Management, compiled from monthly surveys of buyers at large U.S. firms, stayed well above the crucial 50 reading, delineating sector growth from sector contraction. In fact, they sometimes topped 60. The November ISM service sector PMI stood at 60.7 in November, signaling the 106th consecutive month of growth for non-manufacturing businesses. ISM’s factory PMI was at 59.3 in November, but fell to 54.1 a month later.12,13

GLOBAL ECONOMIC HEALTH

All year, the world watched the unfolding trade war between America and China, which also had consequences for other U.S. trading partners. At the start of the year, the U.S. placed minor import taxes on a few types of Chinese goods. In March, President Trump announced a 25% tariff on all steel imported to America and a 10% tariff on all aluminum imported to our shores. Tariffs on $50 billion in trade with China were subsequently imposed, and that ceiling rose to $250 billion later in the year; it was poised to increase by an additional $250 billion, effective January 1, but bilateral negotiations at the start of December delayed the implementation of any new tariffs for 90 days. China retaliated during the year with tariffs on $110 billion in U.S. goods, including aircraft, fruits and nuts, soybeans, and alcoholic beverages.14,15

At the end of November, President Trump, Canadian Prime Minister Justin Trudeau, and outgoing Mexican President Enrique Peña Nieto signed off on the United States-Mexico-Canada Agreement (USMCA), intended by the U.S. as a replacement for the North American Free Trade Agreement (NAFTA). If ratified by the legislatures of all three countries in 2019, the USMCA will adjust regulations pertaining to agriculture, auto manufacturing, and labor laws. On Capitol Hill, approval of the USMCA may be far from automatic.16 

In the United Kingdom, approval of the Brexit deal, struck by Prime Minister Theresa May with the European Union, was no given. Opposition mounted during the year as both politicians and the general public began to consider the complications ahead. By December, support for May’s deal was so lacking that she withdrew it from Parliament. With a deadline for the Brexit less than four months away, no clear Brexit route had emerged; apart from May’s deal, the other options were either a no-deal (“hard”) Brexit, a “managed” no-deal that would set down at least some trade parameters with E.U. members, or another referendum on the matter.17

The engine of the world’s second-largest economy seemed to be slowing down. After trending downward in the fall, both the official (49.4) and Markit Caixin (49.7) manufacturing PMIs for China fell below 50 in December, signaling sector contraction rather than growth. This problem was not confined to China, but regional: factory PMIs in South Korea, Malaysia, and Taiwan were also under 50 by the end of the year.18 

WORLD MARKETS

It was a trying year for equities worldwide, yet two benchmarks achieved double-digit gains. Brazil’s Bovespa ascended 15.03%, and Russia’s Micex rose 12.16%. These indices were not the only ones in the green for 2018. Argentina’s Merval advanced 1.06%; India’s Sensex rose 5.91%, and its Nifty 50 improved 3.15%.19

Few indices realized such success, especially ones removed from emerging markets. All the major benchmarks in Western Europe took losses of 10% or more: the CAC 40 fell 10.95%; the FTSE 100, 12.48%; the FTSE Eurofirst 300, 13.03%; the IBEX 35, 14.97%; the DAX, 18.65%. The Nikkei 225 pulled back 12.08%. Australia’s All Ordinaries fell 7.42% on the year; Taiwan’s TWSE 50, 8.20%; Canada’s TSX Composite, 11.64%; Mexico’s Bolsa, 15.63%; Hong Kong’s Hang Seng, 13.61%, the Shanghai Composite, 24.34%. Lastly, the MSCI World index fell 7.71%; the MSCI Emerging Markets index, 2.92%.19,20

COMMODITIES MARKETS

On the whole, 2018 was not a good year for commodities. Perceptions of slowing global growth reduced buying interest. Energy futures fell 17.5% overall for the year. Taking a deeper look, WTI crude retreated 28.58%; RBOB gasoline, 31.50%; heating oil, 21.18%. Natural gas rose 2.24%. On the NYMEX, a barrel of oil was valued at $45.83 at year’s end.21,22

Metals retreated 12.0% as a class. Gold was worth $1,284.50 an ounce on the COMEX at the closing bell on December 31; silver, at $15.54 an ounce. The runaway winner among metals in 2018 was palladium, which rose 11.81%. In fact, palladium was the only notable metal to post a 2018 gain. Gold lost 5.17%; silver, 15.41%; copper, 17.15%; platinum, 16.11%.22,23,24

Ag futures rose 2.7% in 2018, led by wheat’s gain of 17.84% and the 13.20% rise of oats. Corn improved 6.69%. On the other hand, soybeans fell 7.27%; rough rice, 12.48%.23,24

REAL ESTATE

As 2018 ended, a seller’s market seemed closer to turning into a buyer’s market. In many metro markets, sellers could still receive multiple offers in hours and find a buyer within days, but the housing market unmistakably cooled during the year. It showed definite signs of strength in the fourth quarter, though: the National Association of Realtors said that the number of resales increased 1.4% on a month-over-month basis in October, and another 1.9% in November. Even so, the rate of existing home sales decreased 7.0% across the 12 months ending in November. NAR reported a median sales price of $257,000 in November, 4.2% higher than a year earlier. Inventory was still slim at 3.9 months in November, albeit better than the 3.5 months of supply seen in November 2017.25,26

The pace of new residential construction slowed in 2018. As the year ended, the latest available Census Bureau report on the matter showed housing starts down 3.6% year-over-year through November. The pace of completions had also weakened 3.9%. Permits for new projects, however, were up 0.4% on an annualized basis. Because of the year-end federal government shutdown, the latest data on new home sales at this writing pertains to October; through October, new home buying had slowed 12.0% year-over-year, and the median sale price was at $309,700.27,28

Borrowing costs certainly rose in 2018, and mortgage rates reflected that. Back on December 28, 2017, the interest on 30-year, fixed-rate home loans averaged 3.99% by the calculation of mortgage reseller Freddie Mac. Freddie’s December 27, 2018 survey of the mortgage market found the mean interest rate on a 30-year FRM at 4.55%. Across those 364 days, the average interest rate on a 15-year FRM rose 57 basis points to 4.01%, and the mean interest rate for a 5/1-year ARM increased by 53 basis points to 4.00%.29,30 

Q U O T E   O F   T H E   Y E A R

“We should manage our fortunes as we do our health – enjoy it when good, be patient when it is bad, and never apply violent remedies except in an extreme necessity.”

Francois de La Rochefoucauld 

LOOKING BACK, LOOKING FORWARD

On Wall Street, a promising year went awry, but 2018 did bring two notable firsts. One was positive: on December 20, the Dow Jones Industrial Average gained 1,086 points in a single trading session, an unprecedented four-digit daily rise. The other was negative: for the first time in its history, the S&P 500 advanced for the first three quarters of a calendar year and took an annual loss.1,31

Rising 130.25% for the year, the CBOE VIX volatility index settled at 25.42 on New Year’s Eve. It was not the only benchmark in the green for 2018. The Russell 2000 and S&P SmallCap 600 posted respective 2018 losses of 12.18% and 9.75%.1

MARKET INDEX

2018

2017

2016

DJIA

-5.63

25.08

13.42

NASDAQ

-3.88

28.24

7.50

S&P 500

-6.24

19.42

9.54

    

YIELD

12/31 RATE

1 YR AGO

2 YR AGO

10 YR TIPS

2.69

2.40

2.45

Sources: wsj.com, barchart.com, treasury.gov – 12/31/181,32,33,34

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

As 2019 starts, the equity market faces the same challenges it did in late 2018. Sentiment is less bullish: Wall Street is concerned about what the coming earnings seasons will be like with the effects of the 2017 tax cuts fading, what will happen with the U.S.-China trade war, and whether economic indicators will maintain their strength. The financial system has also been losing some liquidity with the Federal Reserve continuing to unwind its balance sheet. The economy will likely be in good shape this year, but the data may not be compelling enough to impress institutional investors. The market could surprise to the upside and make a startling rebound across 2019, but there is much uncertainty, and that implies much volatility ahead. Diversification and patience will both be critical this year, whichever way the market goes.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MICEX 10 Index (Russian: Индекс ММВБ10) is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The NIFTY 50 index is National Stock Exchange of India’s benchmark broad based stock market index for the Indian equity market. It represents the weighted average of 50 Indian company stocks in 12 sectors and is one of the two main stock indices used in India. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse.  The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The FTSE Eurofirst 300 measures the performance of Europe’s largest 300 companies by market capitalization and covers 70% of Europe’s market cap. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value, and is also the first narrow-based index published in Taiwan. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Mexican Stock Exchange commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The KBW Bank Index is designed to track the performance of the leading banks and thrifts that are publicly-traded in the U.S. The Index includes 24 banking stocks representing the large U.S. national money centers, regional banks and thrift institutions. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

CITATIONS:

1 – markets.wsj.com/us [12/31/18]

2 – cnbc.com/2018/12/19/fed-hikes-rates-by-a-quarter-point-.html [12/19/18]

3 – tradingeconomics.com/united-states/gdp-growth/ [1/3/18]

4 – tradingeconomics.com/united-states/personal-spending [1/3/18]

5 – 247wallst.com/retail/2018/12/14/november-retail-spending-growth-tops-expectations/ [12/14/18]

6 – bloomberg.com/quote/CONCCONF:IND [1/3/19]

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