2018 was an unusual year. On the one hand, the US economy posted perhaps its best year since the global financial crisis of 2008: worker productivity surged, wage growth accelerated, and household net worth rose above $100 trillion. And for the first time in American history, the number of open job listings exceeded the number of people seeking employment.
On the other hand, the equity markets struggled. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674 and eventually reached a new all-time high of 2,931 by late September (despite a 10% correction in February).
And then the markets went into an abrupt decline, falling 19.8% between the latter half of September and Christmas Eve. A rally in the last week of year mitigated the decline somewhat, but the index still posted a solid six percent decline (ignoring dividends) on the year.
And the U.S market was not alone. No developed market outside the US posted a positive return, and among emerging market nations, only one posted a gain.
Planning and Perspective
So, as an investor, what are we to make of this? Below are some thoughts to keep 2018 in perspective:
- 2018 was the tenth year of the last 39 (beginning with 1980) in which the S&P 500 Index closed lower than where it began. At the long-term historical rate of one down year in four, 2018 was what would normally expect to see.
- It may be difficult to remember, but this correction was the fifth stock market correction since 2010 (as defined by a decline of 10% or more in the S&P 500).
- April 23, 2010 – July 2, 2010: – 16%
- April 29, 2011 – October 2, 2011: – 19.4%
- May 21, 2015 – February 11, 2016: – 14.2%
- January 26, 2018 – February 8, 2018: – 10.2%
- September 20, 2018 – December 24, 2018: – 19.8%
Despite these corrections, the S&P 500 has more than doubled in value since 2010, and an investor who invested $100,000 in the Dimensional Global 60/40 Portfolio on January 1, 2009, and reinvested all dividends, would have a portfolio worth approximately $217,000 as of December 31, 2018 (Source: Dimensional.com).
- For younger accumulators, this is where money can be made in stocks. The “wait and see approach” simply does not work because, by the time things look better, prices will be much higher. Keep investing on a systematic basis, and in ten years and beyond you will be glad you did.
- For retirees and pre-retirees, this is where planning comes in. Properly diversified portfolios include an allocation toward cash and safer bonds that can be drawn upon during a market decline. It’s this kind of a well thought out investment and retirement plan that mitigates retirement risk and puts the odds of you having adequate resources for the rest of your life firmly in your favor.
As you know, we are not market forecasters. Instead, we manage portfolios based upon a well-thought-out financial plan that assumes markets are volatile. That being said, it’s worthwhile to note that historically the market has produced higher than average returns the 12 months following a correction or bear market, with an average return of 11.2%.
If you have any questions about this or anything else, please feel free to contact our offices.