2018 has been a tough year in which to make money.
2018 is “The worst time to make money in the markets since 1972” according to a recent Bloomberg article.
“Things have not been this bad since Richard Nixon’s presidency”.
Research undertake by Ned Davis Research, who places markets into eight big asset classes, everything from bonds (Fixed Interest) to US and international stocks and commodities, not one of them is “on track to post a return this year of more than 5%, a phenomenon last observed in 1972”….
As they note, in terms of absolute loses, think Global Financial Crisis (GFC 2007/08), investors have incurred far worst returns in 2018, nevertheless, as far as breadth of asset classes failing to deliver upside returns, “2018 is starting to look historic.”
Nothing has worked this year. Year to date: global equities are down, as are emerging markets, hedge fund indices, global commodities (even oil), International Credit, Global High Yield, US Fixed Interest, US Inflation Protected Bonds, while Global Aggregate Fixed Interest have eked out a small gain. Investments into unlisted assets have been more rewarding.
“That’s all but unique in history. Normally when something falls, something else gains. Amid the financial catastrophe of 2008, Treasuries rallied (increased in value). In 1974, commodities were a bright spot. In 2002, it was REITs. In 2018, there’s nowhere to run.”
Outcomes are a little better if you are a New Zealand (NZ) based investor, Cash is on track to return around 2%, 6 month Term Deposits 3.5%, NZ Fixed Interest is up around 4%, and the NZ Sharemarket is currently up 3%. Still they are all short of 5%. Meanwhile the recent strength in the NZ dollar has detracted from offshore returns.
It has been a tough year, global equities reached all-time highs in January, fell heavily in February and March, only to recover up to October, with the US Sharemarket reaching a new historical high.
Since October yearly gains have been erased due to a number of factors, some, but not all, of these factors are briefly outlined below.
In short, as highlighted by a recent Barron’s article markets appear to be panicking over everything.
Recent market drivers in brief:
- Primarily concern for Sharemarkets has been a reduction in global economic growth expectations. Global investor sentiment toward the pace of global economic growth in 2019 has become more cautious over recent months. Global sharemarkets have adjusted accordingly. Albeit, the sharmarket adjustment does appear to be overdone relative to the likely moderating in global growth in 2019, which has also largely been anticipated.
- Global Trade concerns continue to negatively impact global markets e.g. Australia and commodities, primarily the ongoing negotiations between the US and China are a source of market volatility and uncertainty.
- Brexit more recently. The UK are going to have to pay a price for leaving the EU, why? too stop other countries ever considering leaving the EU as a viable option. Unfortunately, while Brexit is an important issue and will be a source of volatility, the negative consequences will largely sit with the UK rather than the rest of the world.
- There has been considerable oil price volatility, the price of oil fell by over 20% in November.
- There has also been uncertainty as to likely pace of increases in the Federal Funds Rate by the US Federal Reserve (US Central Bank).
Inverted Yield Curve
Lastly, markets have also latched onto the inversion of the US Yield curve.
Inversion is when the yield (rate of interest) is lower on longer dated fixed interest securities compared to shorter dated securities. Under normal circumstance longer dated securities have a higher yield than shorter dated securities.
An “inverted” yield curve has been useful, though not perfect, in predicting economic recession and equity bear markets (when sharemarkets fall in value of over 20%),
On this occasion the market has focused on the three year security versus the five year security.
Normally, the market focuses on the three month versus the 10 year security as the best predictor of economic recession. For a further discussion see Risk of Economic Recession and Inverted Yield Curve and US Recession warning. An inverted yield curve is a necessary but not sufficient condition in predicting a recession, and there is often a lag.
As the Barron article highlights: “Since 1965, the three-year yield has been higher than the five-year on seven different occasions. In 1973, the stock market had already sunk into a recession. In the other six instances, the median distance to a recession was 25 months—or more than two years. The S&P 500 went on to gain a median 20% over the 24 months following such an inversion. “Historically, not only have returns tended to be very strong, but the bear market has generally been years away,”
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