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Investment Insights: 2018 In Perspective

04 January 2019

By Cliff Aque, CFA, Investment Strategist

A popular search engine announced that “good” was the word people most searched for in 2018, but it is doubtful that it was attached to any searches related to the U.S. stock market, which posted its first negative year since 2008 (on a total return basis). Nobody would disagree that the stock market being down is not a “good” thing, but it is important to keep last year’s performance in perspective, as most other asset classes were down as well. Even core U.S. fixed income spent most of 2018 in the red, but ended the year up 0.01%. With the exception of short-duration fixed income, there was truly nowhere to hide last year.


2018 likely felt worse because the negative performance across asset classes came after two consecutive years where all 15 asset classes (Fig. 1, above) ended in positive territory. Over the past 20 years, a majority of asset classes rising together is not rare, but all of them declining is. Even in 2008 and 2015, at least one-third of the asset classes provided positive performance (See Fig. 2, below).

Amplifying the negative feelings around 2018’s performance was the return of market volatility, which we discussed on several occasions throughout 2018. Looking at the CBOE Volatility Index (VIX) (Figure 3, below), which measures future volatility expectations of the S&P 500, we see that in 2017, volatility levels were historically low as the VIX averaged 11.4. By comparison, 2018 was much more volatile, with the VIX averaging 16.6. However, this must be taken in context of its historical average, which has been 19.3 since its inception in 1990. So, while 2018 felt frenetic, it was a somewhat average year in terms of volatility.


2018 also felt more volatile because it saw 37 days where the S&P 500 Index was up or down more than 1.5% (nine of which were in December), whereas there were only two days in 2017 when the index moved that much. So when compared to the recent past, 2018 seemed extremely volatile, but over the last twenty years, the S&P 500 has averaged 38 days per year where it was up or down more than 1.5%; again making 2018 look average.
Investors often think about the tradeoff between risk and return and how much they are being rewarded. 2018 was the fifth negative year over the last 20, but in comparison to the other down years, 2018 was less volatile and down less (Figure 4, below). After positive performance in each month of 2017 and exceptionally low volatility, 2018 felt much worse than it really was.

There is no doubt that volatility awoke in 2018 and is likely to persist into 2019, but this is actually pretty normal. Economic fundamentals may be showing some signs of growth slowing in the U.S., but that is to be expected as the Fed tightens and the tailwind from fiscal stimulus fades. Corporate earnings are still expected to grow in 2019 and consumers are relatively confident, with low unemployment and moderate wage growth, which should bode well for the U.S. economy and hopefully the stock market. If any of the multiple uncertainties plaguing the markets (e.g., trade with China, Fed policy, or the government shutdown) can be resolved, the market may finally see some relief.

Figure 1 – Source: Bloomberg.  Data as of 12/31/2018. Data represents 2018 total returns by asset class. Short-Term Bonds: Bloomberg Barclays 1-3 Yr US Gov/Credit Total Return Index measures the non-securitized component of the US Aggregate Index. US Core Bonds: Bloomberg Barclays US Aggregate Total Return Index is generally considered a representative of the US bond market. Global Convertibles: ICE BofAML Global 300 Convertible Index comprises issues of investment-grade convertible bonds and preferreds in North America, Europe and the Asia/Pacific Region. Global Bonds: Bloomberg Barclays Global-Aggregate Total Return Index measures global investment-grade debt from twenty-four local currency markets. Long-Term Bonds: Bloomberg Barclays US Long Treasury Total Return Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Gold: Gold Spot is the price in US Dollars per Troy Ounce. High Yield Bonds: Bloomberg Barclays US Corporate High Yield Total Return Index measure the USD-denominated, high yield, fixed-rate corporate bond market. Corporate Bonds: Bloomberg Barclays US Corporate Total Return Index measures the investment-grade, fixed-rate, taxable corporate bond market. S&P 500 is considered a representative of the US stock market. Emerging Market Bonds: JPMorgan EMBI Global Total Return Index tracks total returns for traded external debt instruments in the emerging markets. US Small Cap: Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 index. Commodities: Bloomberg Commodity Index reflects commodity futures price movements. International Developed Equity: MSCI EAFE Index covers DM countries in Europe, Australasia, Israel, and the Far East. Emerging Markets Equity: MSCI Emerging Markets Index captures large and mid-cap representation across Emerging Markets countries. China Equity: MSCI China Index is generally considered a representative of the Chinese equity market.

Figure 2 – Source: Bloomberg.  Data as of 12/31/2018. Data based up total returns for each asset class/index for each calendar year and categorized by positive and negative returns. See index definitions in Figure 1 disclosure.

Figure 3 – Source: Bloomberg.  Data as of 12/31/2018. CBOE Volatility Index (VIX) reflects a market estimate of 30-day volatility, constructed using the implied volatilities of a wide range of S&P 500 Index options. CBOE is the ticker symbol for the Chicago Board Options Exchange. Each dot represents a single trading day in the S&P 500 that resulted in a return greater than 1.5% or less than -1.5%.

Figure 4 – Source: Bloomberg.  Data as of 12/31/2018. Each dot represents a calendar year for the S&P 500 since 1998.  X-axis is the S&P 500 annual total return.  Y-axis is the standard deviation or amount of variation in daily returns within each calendar year for the S&P 500.



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