2018 stock market report

US stocks lost 6%. The new year brings familiar risks, and some new opportunities.

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Key takeaways

  • Stocks, along with bonds, oil, and gold, broadly lost value in 2018.
  • Among US stocks, the energy sector was once again the worst performing sector, while health care and utilities were the lone sectors to finish in positive territory.
  • There are several reasons to be cautiously optimistic for 2019, with new potential opportunities.
 

After a double-digit rally in 2017, global stocks came back to earth in 2018. The MSCI World Index fell 10%—just the second annual loss over the past 10 years.1

For US investors, 2018 could be defined by a tumultuous mix of strong corporate earnings (buoyed by the tax cut passed in late 2017), 4 more rate hikes by the Federal Reserve, and a ratcheting up of global trade war disputes. The S&P 500 lost 6% last year on a price return basis (i.e., not including dividends), and briefly entered bear market territory in late December.

Of course, stocks are still significantly higher if you look at a longer time frame. The S&P 500 has gained 36% over the past 5 years, and has nearly tripled during the last decade (see chart below).

In addition to trade wars and higher rates, many of the potential risks that have rattled stocks recently remain, as investors turn the page on a new year. These include a maturing business cycle and valuations that, while having improved due to the market correction, still remain elevated relative to historical levels. With that said, there are several reasons to be cautiously optimistic, and new opportunities exist to consider.

The story changed in 2018

It was a mostly down year for investors around the world, as developed international and emerging markets weakened. Bonds (-0.2%), gold (-2%), and oil (-25%) all shed value as well.2

In the US, stock markets lost their 2017 momentum, when 9 of the 11 US stock market sectors finished in the green on route to a roughly 30% gain for the S&P 500. 2018 was a different story. Health care (+5%) and utilities (+0.5%) were the lone sectors to post gains during the year, while 6 sectors incurred double-digit declines (see Sector performance table).

Small- and mid-cap stocks declined more than large-cap stocks, and value stocks underperformed growth stocks.

Of course, there was dispersion within market cap, style, and sector. At the industry level, the top performers were independent power and renewable electricity producers, internet & direct marketing retailers, and software companies (see Industry price returns table). The worst performing industries were energy equipment & service providers, household durable companies, and tobacco producers. Overall, just 20% of the S&P 500 subindustries experienced gains.

Not as volatile as you might think

2018 closed amid several bouts of heightened volatility. In early December, the Dow Jones Industrial Average fell more than 800 points in a single day, and stocks briefly entered a bear market (a greater than 20% decline from the September 21 intraday record high) in late December. Subsequently, the Dow climbed over 1,000 points on December 26—the largest daily point gain in history and the highest daily percentage gain since March 2009.

While the large price swings and year-end ups and downs might lead investors to think the entire year was volatile, the level of volatility was actually in line with other years by several measures. Following the historically calm 2017—when the S&P 500 rose or fell by 1% or more just 8 times—there were 64 such instances in 2018. That was just below the average of 69 since 2000 (see Volatility and new highs by year).

Also, while the CBOE Volatility Index (VIX)—the so-called "fear gauge"—increased by more than 145% in 2018, that was, in large part, a reflection of the historically low levels that began the year. Indeed, the VIX spent most of the year hovering near or just above historically low levels.

Assessing the 2019 landscape

While past performance is no guarantee of future results, evaluating what drove the market in 2018 may help you manage your investments for next year. The key risks that appear to have distressed markets in December, and may persist into 2019, include:

  • Trade wars disrupting global growth—In October, the International Monetary Fund (IMF) cut its global growth forecast for 2018 and 2019, due in large part to tariffs implemented by the US and China—the world's 2 largest economies.
  • A prolonged government shutdown—Uncertainty caused by the US government shutdown, which entered its 14th day on January 4, could contribute to volatility in the early part of the year.
  • A potential rise in inflation—Interest rates and inflation increased in a number of economies around the world, leading to the possibility of slower growth.
  • Relatively high valuations—Despite the recent correction and stocks briefly touching bear market territory, the S&P 500 is still trading at relatively expensive valuations (as measured by the price-to-earnings ratio) compared to historical values.
 

With these factors in mind, there are reasons to be cautiously optimistic about US stocks, including persistently strong corporate earnings growth, healthy employment rates, and the existence of numerous industries with strong growth prospects. According to Fidelity's 2018 sector outlook, some investable ideas include gene therapy, artificial intelligence, utilities, and technology.

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