Monday, January 7, 2019

From the Desk of David Burks: What Does 2018’s Poor Market Finish Mean for 2019?

David Burks
Author position
Sr. Vice President | Equity Income Analyst

From the Desk of David Burks

Hilliard Lyons Senior Vice President and Equity Income Analyst David Burks has been with the firm since 1983. He has been nationally recognized for his stock recommendations eleven times: seven times by Thomson Reuters and four times by The Wall Street Journal. David has appeared regularly on CNBC over the years.

What Does 2018’s Poor Market Finish Mean for 2019? Perhaps a Better Question Might be, “What Are You Going to Do in 2019?”

Well, the market’s nine year consecutive winning streak has finally come to an end. After hitting a new all-time record high on October 3, the Dow Jones Industrial Average, and virtually all stocks for that matter, plunged the balance of the year. This marked the first down year for stocks since 2008. For the record, the DJIA declined by 5.6% in 2018. The Standard & Poor’s 500 index fell by 6.2%, while the Nasdaq composite lost 3.9%.

However, it was the way that stocks declined during the fourth quarter that investors will most likely remember about 2018. During the fourth quarter the Dow fell nearly 12%, while the S&P 500 dropped by nearly 14%. The tech heavy Nasdaq was particularly hard hit, falling by 17.5% in the year’s last three months. Not only was it a poor quarter, it was a particularly treacherous December. All three indexes fell by at least 8.7%, and this was the single worst performance for both the Dow and S&P 500 since December 1931, some 87 years ago.

2018: A Perspective

After such a poor finish to the market last year, it would be only natural for investors to feel nervous, discouraged, and apprehensive about the coming year—especially with just how rapidly the market deteriorated in late 2018 after attaining new record highs earlier in the fall. With that in mind, we’d like to utilize the following charts to hopefully put last year’s market performance into better perspective.

There’s no way to sugarcoat it; this was simply a very poor quarter for the stock market. The major averages, including the Dow, S&P 500, and the Nasdaq, all experienced double-digit declines in the fourth quarter. The sharp sell-off came as a major negative surprise to investors, particularly as the market had trended steadily higher from late June through early October, setting new records in the process. It marked the first time in history that the S&P 500 ended the year with a loss after being positive for the first three quarters. With such a poor year-end performance, we can understand why investors might have been eager to turn the calendar.

The following headline, or something similar, has appeared in virtually every description of last year’s stock market: “It was the worst year for stocks since 2008.” This is certainly an accurate statement. However, we’d like to add a little context with the following sentence: “It was the first down year for stocks since 2008.” We mention this because it serves as a valuable reminder that investors have enjoyed an historic, remarkable nine year bull market run prior to 2018’s late-year decline. Realistically, the market was probably overdue for a meaningful pullback, and now we have one. Also, we note that the market was essentially down just 6% in 2018. While clearly disappointing, this decline pales in comparison to the 38% collapse in 2008 or the very sharp 22% sell-off in 2002. In addition, 2018’s modest decline followed a strong 19% gain in the S&P 500 in 2017. Moreover, for the first time in stock market history, there was not one single down month in 2017. This sustained strength created an especially difficult market comparison for 2018. Also of note, 2017 was the least volatile year for stocks since 1964.

Yes, the market declined in 2018. Yet, in the long term scheme of things, this has not represented a major reversal of fortune, at least not thus far. We believe the chart above illustrates and reinforces the belief that investors wishing to build long-term wealth should have exposure to stocks. While the inherent risk of potential declines always exists, history shows the longer your time horizon as an investor, the higher the probability you’ll see gains. We continue to believe there is ultimately more risk being out of the market than in the market for investors seeking growth.

Additional Thoughts on 2018

We do not wish to minimize the magnitude of the market’s recent decline. It has been both sharp and painful and the numbers back that up. Since its record closing high in late August, the Nasdaq composite has fallen by 16.1%. From its September record high, the S&P 500 has dropped 13.6%. The Dow Jones Industrial Average has declined by 12.6% since early October’s record close. These numbers have actually improved somewhat due to a significant year-end rally.

In addition, many individual stocks have fallen by 20% or more, and most companies trade at or near their 52-week lows. Whether we’re in the midst of a correction or bear market, it’s difficult to see the value of your investments now materially lower than where they were just months ago. Yet, we realize there’s constant risk associated with owning stocks, especially in the short term. As we stated in our October 2018 “Stay the Course” article, “Unfortunately, volatility is the price that investors must be willing to pay to have the opportunity to participate in long-term gains.” We continue to believe stocks represent an attractive, suitable option for investors wishing to build long-term wealth.

Looking Ahead to 2019

Given the less than ideal finish to 2018, it’s understandable why investors could be anxious looking ahead to 2019, wondering how the market might perform. Allow us to be completely candid: We don’t know and neither does anyone else. While we certainly can venture an opinion based on a variety of data and assumptions, any projection we or anyone else makes may or may not come to fruition. That’s simply due to the nature of the market. Stock prices are influenced by any number of factors ranging from company fundamentals to US economic growth, Fed policy, geopolitical developments, corporate profits, interest rates, and unforeseen events to name just a few—not to mention the emotion driven trading that comes with major swings between fear and greed. As a result, we believe it is a difficult and perhaps unproductive task trying to time the market.

As is the case with most any year, we think there are any number of reasons to currently be either optimistic or pessimistic. Bulls can make a solid argument that the economy is still growing, albeit likely at a slower pace, corporate earnings remain generally strong, valuations are much more reasonable, and unemployment in the US stands near a 50 year low. Yet bears can counter that both global and US growth is slowing, our trade battle with China is already having a negative impact and remains a major risk, and that the Fed’s policy of raising rates may prove punitive to the economy. Yes, there’s lots of uncertainty now, just as there almost always is. Weak periods like we’ve experienced of late also remind us that the stock market doesn’t owe us anything, nor are we promised positive returns. We believe investors would be better served by continuing to focus on their own individual financial goals and how to attain them rather than getting caught up in the market’s day to day fluctuations.

Reasons for Potential Optimism?

While we are not going to provide specific market projections, we can offer a few reasons why investors may feel at least somewhat optimistic despite the recent market sell-off. First, the Standard & Poor’s 500 has only had four periods of consecutive yearly losses since 1926. So history could be on investors’ side in 2019. History also says markets tend to rebound meaningfully after particularly bad quarters like the fourth quarter of 2018. Financial blogger Ben Carlson looked at the data surrounding the seven worst quarters since 1946 for the S&P 500 and found that on average the index was 23% higher one year later (“Buying When Stocks are Down Big,” Dec. 23, 2018; Carlson also looked at the ten worst quarters of the Russell 2000 (an even broader index which began in 1979) and found even higher returns. On average, one year later the Russell 2000 had risen by nearly 32%. Of course all market environments vary and there can be no assurance that such a similar trend may occur this time.

In addition, we note that current investor sentiment is unusually negative by historic standards. In the past when investor sentiment has been at extremes, either positive or negative, the market has tended to move in the opposite direction. In effect, sentiment has often served as a contrarian indicator. Please see our report, “Could Extreme Negative Sentiment Offer Possible Hope to Investors?” dated December 18, 2018 for more discussion.

Finally, while these factors may offer potential encouragement to investors, that’s not to say the market can’t continue to move lower or that the economy could not weaken. There remain many moving parts to the economy’s fundamental outlook, and how they could influence the stock market continuously changes. We anticipate that the market’s recent high level of volatility will continue this year.

What Should You Do in 2019?

So what should you do as an investor in 2019? Most Americans start each year with three financial resolutions: save more, pay down debt and spend less. Maybe these resonate with you, maybe they don’t. Regardless, we believe the start of a new year represents a good time to meet with your Hilliard Lyons Wealth Advisor to discuss and review your financial situation.

There are any number of questions that you might want to consider and discuss:

  • What is my risk tolerance in light of the market’s recent pullback?
  • Do I need to rebalance my asset mix? Am I properly diversified among different investment categories?
  • Do I have sufficient cash reserves for any unexpected expenditures?
  • Am I saving enough for retirement?
  • Have my investment goals changed or will they be changing soon?
  • What are realistic expectations for my investments?
  • Do I have a good understanding of my investments? And the justification for owning them?
  • Is it time to take advantage of this pullback in stock prices?

These are just a few of the topics that potentially could be discussed. We think such a conversation could not only be educational and informative, but could perhaps also provide additional peace of mind during a difficult period. Hilliard Lyons is here to help.

Final Thoughts

We’d be remiss if we didn’t take this opportunity to encourage investors to keep saving and investing in 2019, despite the recent market setback. While short term market volatility will always be present, we remain convinced that continued long-term investing is essential to wealth creation. Our former Chairman of Hilliard Lyons, the venerable late Henning Hilliard, used to say, “The best day to invest is today.” We believe that was wise advice years ago and remains just as relevant today.

We wish you good health, much happiness, and continued progress in the pursuit of your financial goals in 2019.


Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.