Author: Dennis Gogarty

Dennis Gogarty

2018, A Return to Normalcy

Looking back, 2018 certainly felt like a roller coaster ride for investors.  After a fantastic nine year run where US stocks returned an annualized 15.44%, you can see why 2018’s results came as a surprise for many.  Coming off their 4th best year since 2000, domestic stocks, as measured by the Russell 3000, had their first calendar year decline since 2008.  The volatility in the equity markets seemed unusual given recent data, but in many ways 2018 provided a return to historical normalcy that we hadn’t seen yet this decade. 

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Financial News and Portfolio Management Discussion through January 5th

US Stocks posted another volatile week, but ended with gains after positive economic numbers reduced near term recession fears.  The S&P 500 gained 1.9% and the Dow rose 1.6% for the week.  Internationally, Japan dropped 2.3% and Europe jumped 2.1% for the week.  Oil rallied as well ending the week up 5.8% at $47.96 a barrel.  The yield on the 10-year Treasury, after hitting its lowest point since last January, ended the week lower at 2.66%.

The December jobs reported well outpaced expectations with 312,000 new hires.  The unemployment rate rose to 3.9% from 3.7% as the labor participation rate increased.  Wage growth was up 0.4% in December over November, more than expected and is up 3.2% from a year earlier.  It’s the fastest pace of wage growth since 2008.  October and November were also revised higher by a combined 58,000.

A gauge of Chinese manufacturing showed the sector contracted for the first time since May 2017.

Apple shocked investors cutting its quarterly revenue forecast for the first time in over 15 years for its fiscal first quarter driven by weakness from iPhone sales in China.  The surprise revenue cut was another sign of potential weakness from China.

December manufacturing numbers from the euro zone were the weakest in more than a year and US manufacturing in December posted its largest one month drop in growth since 2008

US auto sales eased in December, but held steady for the full year with 17.3 million sales countering predictions the market would cool.

Fed Chairmen Powell said in a speech the Fed will be “patient as we watch to see how the economy evolves,” and they are “prepared to adjust policy quickly and flexibly” If needed.  Half of investors believe the Fed will actually cut rates in 2019.

Bristol-Myers Squibb agreed to purchase Celgene for $74 billion combing two major pharmaceutical companies focused on cancer drugs.

December Market Commentary

US stocks dropped again in December nearing bear market territory before rebounding partially to end the month.  It was the worst year for US stocks since the financial crisis.  Fears of slowing global growth dominated investors’ minds over the month.  Also weighing on stocks were the future moves of the Fed, the trade squabble with China and US government shutdown.  Economic news is still generally solid, but it has cooled since earlier in the year.  The November jobs report showed 155,000 new hires, slightly below expectations and wage gains held at 3.1%. US retailers posted one of the best holiday shopping seasons in years with sales rising 5.1% over last year and consumer spending increased for the 9th straight month.  However, durable goods orders fell for a third straight month, consumer confidence fell for a second straight month and home price growth was flat.  Oil ended the year at $45.51 a barrel despite an agreement from OPEC members and Russia to cut production by 1.2 million barrels a day.  Oil fell 25% over the year.  In December, US stocks plunged, falling 9.31% and 14.30% for the fourth quarter.  For the year, US stocks were down 5.24%.

Foreign stocks fell over the month on global growth fears, but held up better than US stocks.  China and the US agreed to postpone an increase in tariffs for 90 days to allow for further negotiations to a deal, however the nations still remain far apart. The European Central Bank announced it was ending its bond purchase program, lowered its forecast for growth by 0.1% for 2019 and 2020 and said they would hold on to their bond portfolio for “an extended period of time.” Industrial production in China in November slowed more than expected and retail sales growth fell by the most in over 15 years. French business production contracted for the first time in two and a half years and Germany’s Purchasing Managers Index reached its lowest level in four years.  UK Prime Minister May postponed a vote in parliament of her Brexit agreement and vowed to go back to the negotiating table to work out a deal that might have a chance of passing.  Emerging markets topped developed markets in December and the fourth quarter, however developed markets outpaced for the full year.  International stocks sank 4.48% in December and 11.44% for the quarter.  Over 2018 international stocks declined 13.87%.

Bonds surged in December as investors flocked to safe havens on a substantial increase in concern for global growth.  At the Fed’s December meeting they voted to raise the Fed Funds rate a quarter percent to a range of 2.25% to 2.5%.  They also lowered their growth outlook for 2019 from 2.5% to 2.3%. In comments after the meeting Chairman Powell suggested the Fed would target two interest rate increases in 2019.  The 10-year Treasury yield ended the year at 2.69%, its lowest level since the end of January, down from 3.01% to start the month, but up from 2.40% at the start of 2018.  For the month and quarter, Treasury bonds were the top performing sector and longer-term bonds topped shorter-term bonds.  For the year, Agency, Municipal and International bonds were the top performing sectors and shorter-term bonds topped longer-term bonds.  The broad bond market gained 1.84% in December and 1.64% in the fourth quarter. For the year, bonds were flat edging up 0.01%.

 

Index Performance  Dec.4QYTD
US Stock (Russell 3000) -9.31%-14.30%-5.24%
Foreign Stock (FTSE AW ex US) -4.48%-11.44%-13.87%
Total US Bond Mkt. (BarCap Aggregate)  1.84%1.64%  0.01%
Short US Gov. Bonds (BarCap Gov 1-5 Yr)  1.12%1.74%  1.53%
Municipal Bonds (BarCap 1-10yr Muni) 0.99%1.61%  1.64%
Cash (ICE ML 3Month T-Bill) 0.18%0.56% 1.87%

Financial News and Portfolio Management Discussion through December 29th

After an extremely volatile week for stocks the market ended up.  The S&P 500 gained 2.9% and the Dow dropped 2.7% for the week.  Internationally, Japan fell 0.8% and Europe ticked down 0.1% for the week.  Oil ended the week down slightly to $45.33 a barrel, but is off 41% from its October high.  The yield on the 10-year Treasury fell to 2.74%.

At the Fed’s December meeting they elected to raise the Fed Funds rate a quarter percentage point to a rage of 2.2% to 2.5%.  They also lowered their growth outlook for 2019 from 2.5% to 2.3%. In comments after the meeting Chairmen Powell suggested the Fed would target two interest rate increases in 2019.  The rate increase was expected but some investors are now concerned the economy might be cooling more quickly than anticipated.

The US government was shut down at midnight on 12/21 after officials failed to reach a spending deal.

The personal consumption expenditures index increased 0.4% in November for the 9th straight monthly increase.

US durable goods orders fell an adjusted 0.3% in November the third decline in a row.

US retailers posted one of the best holidays shopping seasons in years with sales rising 5.1% over last year, the best performance in six years.

White House advisers commented that the President does not have the authority to remove the Fed Chairmen after concerns arose that the President might try.

The Case Shiller home price index showed that home prices rose 5.5% over the past year ending in October, flat from September, as home prices have cooled.

Consumer confidence fell in December for a second straight month.