Is the Past Prologue or Is It Different This Time?

In this Octavia’s Outlook I quickly look back at 2018 stock market performance. I then look forward at the forces which I believe will drive global stock markets. Finally, I share how these forces influence my thinking in constructing investment portfolios. I know my letters can run long, so to shorten this letter I will not include much in the way of supporting data but instead just share my conclusions.

2018 in Review

Global stock markets excluding the US had a poor year from start to finish, ending the year down 11.6%. US stock markets, on the other hand, started the year strongly but had a very weak Q4. And, US stock market performance was mixed across size, where the S&P 500 (large companies) declined 4.4% in 2018 while the Russell 2000 (small companies) declined 11.1%. Large growth companies, as represented by the Nasdaq 100, were basically unchanged in 2018.

Bonds did not help in 2018, with the US bond market basically unchanged in 2018. While bonds are typically less volatile than stocks, they will not necessarily go up when stocks go down. In fact, in some ways stocks and bonds are now positively correlated since rising interest rates can lead to declines in the prices of both stocks and bonds. This is an important concept to understand. The traditional view of holding a 60% stocks / 40% bonds portfolio where when stocks go up, bonds go down, and vice versa, may not hold going forward and should not be blindly trusted to act as a buffer against portfolio volatility.

Q4 was very challenging for US stock markets due to both fundamental factors and technical factors.