Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy and the global financial markets.
Perhaps “Down-cember” would be a better name for the final month of 2018, as equity markets declined significantly, despite the largest one-day point gain in the history of the Dow Jones Industrial Index (+1,086 on December 26th). Uncertainty continues to be the market’s nemesis with the US Government “shutting down” in late December and with no tangible outcome in the US-China trade discussions. The Trump White House continues to experience unprecedented turnover, with Secretary of Defense Mattis the latest departure, following the decision to remove US troops from Syria. On a positive note, consumer spending was robust during the holiday season and employment continues to be strong.
The Federal Open Market Committee (FOMC) achieved its projected path of normalization for 2018, taking short-term rates to a targeted range of 2.25% to 2.50%. The latest 25 bps hike in December was a unanimous vote, despite building volatility and calls for a pause by some market participants. The dots plot became slightly more dovish, now projecting only two more quarter-point hikes in 2019. The markets were apparently hoping for more, and much attention was given to Chairman Powell’s press conference comments that balance sheet reduction would remain on “autopilot.”
The third estimate of 3Q-18 GDP declined 0.1% to an annualized rate of 3.4%. Expenditures and exports were revised lower, while inventory was revised higher. The general outlook remains the same, with consensus expectations for 4Q-18 GDP between 2.5% and 3.0%, followed by mid-2% growth for 2019 as policy stimulus wanes.
The unemployment rate increased to 3.9% in December, despite the robust addition of 312,000 jobs for the month. The increase in the labor participation rate reflects more people re-entering the workforce by actively looking for jobs. Average hourly wages rose at a healthy, but not explosive, year-over-year pace of 3.2%. That said, inflation expectations declined into year-end, and the FOMC’s preferred measure, the Core PCE index, stands at 1.9%.
Across global equities, there was really no place to find cover as volatility reigned supreme and dampened holiday cheer. The S&P 500, which represents large US-based entities, declined by -9.0% in December and concluded the year down -4.4%. All major sectors in the domestic benchmark were down materially, except for the outlier, Utilities, which “outperformed” with a -4.3% monthly return. For the year, Healthcare was the sector leader at +4.7%, followed by Utilities which barely remained positive at +0.5%. At the other extreme, Energy was down -20.5%, with Materials and Communication Services both down -16.4%. Small cap stocks, as represented by the Russell 2000, entered bear market territory with a -11.9% loss for the month, and ended with a -11.0% return for 2018.
In the broad international developed markets, the MSCI EAFE index outperformed US stocks, but was still down meaningfully at -4.8%. Monthly relative returns were helped by a modestly weaker US dollar, although this was not enough to reverse the year-long underperformance compared to the US markets. As expected, the ECB ended its bond purchase program at the end of the year. Rates are unlikely to increase in the near term, but the period of abnormally easy monetary policy is coming to an end even as global growth and earnings appear to be softening.
Emerging market stocks, as represented by the MSCI Emerging Markets index, “led the way” in December, posting a comparatively small loss of -2.6%. The asset class was still the laggard for the year, down -14.2%.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was down -5.4% during the month, and ended the year down -4.7%. The Alerian MLP index was down significantly for both the month -9.4% and the year -12.4%. The near-month NYMEX oil contract was down -10.8% for the month and ended 2018 with a loss of -24.8%. The more broadly diversified Bloomberg Commodity index -6.9% was down again in December, despite gold +5.0% being in favor during the latest risk-off episode.
With flight-to-quality behaviors in full force, US Treasury (UST) yields crashed lower in the final weeks of the year. Amid financial market volatility, the futures market became increasingly skeptical of additional monetary tightening by the Fed. In this somewhat ideal environment for high-quality fixed income, the overall government bond complex returned +2.2% in December. The commonly referenced 10-year UST yield ultimately ended 30 bps lower to finish at 2.69%. Despite a notable 55 bps decline following multi-year highs in early November, the benchmark rate increased 28 bps in 2018.
Having spent the entire year well underwater, the BloomBar US Aggregate Bond index became a reliable safe-haven as equity volatility spiked. Total returns were up +1.8% during December, which pulled 2018 returns essentially back to flat. Spreads for IG corporates widened by another 16 bps, and despite a virtual halt of new issue supply, credit continued to be the benchmark’s worst performing sub-sector relative to risk-free US Treasuries. The tug-of-war between rates and spreads caused the all-in yield for the index to decline to 3.3%.
The Bloombar 1-15-Year Municipal index returned +1.1% in December, driving full-year returns to +1.6%, even as tax-exempt issues lagged taxable counterparts as base rates moved rapidly lower. The tax-exempt yield curve is notably steeper than that of US Treasuries, providing enhanced yield and better valuations for extended maturities.
The Bloombar US Corporate High Yield index declined another -2.2% in December, with riskier CCC-rated credits and energy-related names being hardest hit. Overall benchmark spreads widened by 108 bps, such that all-in yields finished the year at nearly 8.0%. Global yield moves were directionally consistent with US government bonds, such that unhedged international bonds were strongly positive. Local currency emerging market debt continued to recover, even as this was the worst performing category within fixed income for the year at -6.2%.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.