A Recap of 2018: Surprisingly, Not as Volatile as You May Think-Historically Speaking

Investors around the world were thankful to see the calendar turn to a new year and leave 2018 in the rear view mirror; however, much of the 2018 angst has carried over into the first few trading sessions of 2019. 

The historic tranquility of the 2017 market carried over into the early days of 2018. The calm was short-lived, however, as the S&P 500 (SPX) declined around 9% between January 26th and February 8th, and did not regain its January high until late August. The S&P 500 peaked again in late September, before beginning a new slide in October, which was attributed to trade tensions and concerns that the Fed’s telegraphed pace of interest rate increases was too rapid and could precipitate a recession. These fears continued largely unassuaged through the end of the year — the S&P 500 had its worst December since 1931, bringing its Q4 decline to nearly 14%, and making 2018 the worst year for the index since 2008 with a dismal return of -6.2%.

On average, since 1929, out of the roughly 252 trading days in any given year, there are 60 days in which the S&P 500 records a move of at least +/- 1% from the previous day’s close.  In other words, about 24% of market days could be considered “volatile” days for the market in an average year.  From this perspective, 2018 was just above average with a total of 64 days closing at least +/- 1% from the previous close; however, to put this into a recent perspective, 2017 had just eight such days!  2017 recorded the lowest percent of “volatile days” in the market (3.19%) since 1964.

So, while 2018 was not statistically an incredible volatile year, it certainly felt like in the last quarter as markets pulled back violently off all-time highs, which were achieved in September 2018 as a bulk of the volatility in 2018 came in the fourth quarter.  All this being said, there was quite a bit of technical damage done to some of the major indexes as well as individual stocks, and the volatility has caused many of the major indicators to fall into extremely oversold conditions.

Between 2018’s placid start and furious conclusion, there were a number of other developments, in both the domestic equity market and elsewhere. Contrary to 2017, during which technology, basic materials, industrials, and consumer discretionary were among the best performing domestic equity sectors, 2018 saw the traditionally more-defensive utilities and healthcare sectors turn in the strongest performances as investors sought safety in the final months of the year. Meanwhile, energy, financials, and industrials were among 2018’s weakest performers.

International equities enjoyed a strong 2017, with both developed and emerging equities outpacing the S&P 500; however, both hit the skids in 2018 with no shortage of factors acting as headwinds. The U.S. dollar, which had weakened fairly steadily in 2017, rebounded in 2018, diminishing returns on foreign assets to domestic investors.

The year was not much better for developed international markets as other geopolitical concerns, including Brexit negotiations, were unfavorable for these markets. Finishing down nearly 17% for 2018, the iShares MSCI EAFE ETF (EFA) gave up nearly all of the gains it had made since the year 2000 – from December 31, 1999, through December 31, 2018, EFA returned -0.01% on a price return basis.

2018 also saw significant movement within fixed income. US Treasury rates increased markedly in the first two months of the year and the yield on the 10-year note peaked near 3.25% in September — its highest level in more than five years. Yields then declined sharply in the final months of the year, as the sell-off in the US equity market was accompanied by a spike in demand for US Treasuries and municipal bonds. The late-year bond rally did not extend to credit, as spreads on investment grade and high yield corporate bonds widened. International bonds, which had been a safe haven for investors as rates climbed at the beginning of the year, reversed course as the US dollar strengthened, causing many international bond funds to finish the year in the red. Meanwhile, weakness in the equity markets weighed on convertible bonds, which had been amongst the best performing fixed income segments in 2017 and early 2018.

While the overall story for 2018 was decidedly negative, the final days of December and the first few days of 2019 have provided some cause for optimism. The Bullish Percent for the NYSE and the Bullish Percent for the S&P 500, which each measure the percentage of stocks in within their respective universes that are on Point & Figure buy signals, have each reversed up from near-historic lows, indicating that we have begun to see demand return to the market. Similarly, the NYSE High Low Index, which measures the percentage of stocks on the New York Stock Exchange hitting new 52-week highs vs. those hitting new 52-week highs and lows, has also begun to climb after reaching extremely washed out levels, also indicating that the US equity market may have found its footing.

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