Although we expected more volatility and lower returns in 2018, we didn’t anticipate declines in almost every asset class. Investors know years with losses aren’t unusual – for example, stocks have dropped in about one of every five years in the past.* As the chart shows, less volatile assets classes generally declined less than more volatile ones in 2018 but also had lower three-year returns, reflecting the usual trade-off between risk and return. A better-diversified portfolio with appropriate allocations to all asset classes can help reduce portfolio volatility over time while helping you toward your long-term goals.
Bull market survived – The S&P 500 and the Dow both edged near bear territory on Dec. 24 – down 19.8% and 18.8%, respectively. But they then bounced back sharply, keeping the U.S. bull market alive. However, emerging-market stocks entered a bear market in late October. And December’s declines put U.S. small-and mid-cap stocks as well as the Nasdaq index into bear markets.
Risks seem balanced – Many of the worries that triggered the second U.S. correction in 2018 are likely to continue to prompt volatility in all asset classes in 2019. We think current prices reflect pessimistic expectations and that the risks are more balanced. A resolution of tariff and trade uncertainties, modest global economic and earnings growth and slow rate hikes from a patient Federal Reserve could be catalysts for higher global stock prices.
Positive but volatile outlook – Solid fundamentals and better valuations are a positive environment for investors. We think U.S. economic and earnings growth will continue at slower rates in 2019, helping calm emotions and support rising stock prices. And low expectations mean international equities could benefit if growth in China and developed economies improves slightly. After lagging in the first three quarters of 2018, international equities (EAFE and EM) outperformed U.S. stocks in the fourth quarter, which we think could continue.
The return to higher market volatility is a reminder to stay focused on what matters to you and not daily market moves. We recommend you stay invested over time in an appropriate mix of equities and fixed income based on your comfort with volatility and your long-term goals, and use a consistent investment process that includes adding investments at lower prices during pullbacks (and bear markets) if appropriate.
*Source: Morningstar Direct, 1/1/1976 - 12/31/2018.