Back in November, following a poor year in equities, markets were expecting a ‘Santa Claus rally’- a bullish period for stocks in the run up to Christmas which sometimes sees stocks rise in December. As December drew closer however, the data began to falter, magnifying the existing risks in the global economy and leading us to take a defensive stance in our model portfolios earlier than expected. By making the decision to take a defensive stance and remove the majority of our equity exposure in the first week of the month, we decided not to risk investor capital in the pursuit of eking out final returns of the year waiting for a Santa rally. By doing so, we avoided a further 2% loss in portfolios. As investors grappled with geopolitical fears, US interest rate surprises and fears over the global economic outlook, the rally failed to materialise, leaving many of the global indices in decline over the year.
Following abnormally low volatility in 2017, market volatility returned in 2018, leading to a series of erratic market movements over the year. Central Bank tightening, trade conflicts and political uncertainty resulted in an unremarkable level of turbulence in stocks. The year featured two separate S&P 500 corrections, and the index posted five single-day drops of more than 3%, more than in the last three years combined. Given the outstanding risks within the global economy, volatility is likely to remain in 2019.
Key global indices experienced dismal performances over the year. The FTSE 100 finished 12.5% down over 2018, closing at its lowest level in 2 years. The S&P declined by 6.2%, and major indices in Japan, Hong Kong and Europe all lost ground over the year. US stocks ended the worst year since the financial crisis. A brief advance in US stocks in the final days of the year upon optimism over a US-China trade deal provided some relief to investors, however only trimmed the decline to 9.2%, representing the worst December rout for the S&P 500 since 1931. Europe’s main stock gauge fell 13.2% in the year- the largest drop since 2008.
Away from equity markets, the US 10-year treasury yield slid to 2.68%, the lowest since February’s volatility spike and equity market sell-off, the USD edged lower owing to the US government shutdown after strength over the year, and the yen- which is often regarded as a safe haven currency- advanced to a four-month high. In commodities, crude slumped to its first annual loss since 2015, reversing from a four-year high set just three months ago. Additionally, gold entered 2019 near a six-month high due to safe haven demand. On the back of weaker economic data and poor equity performance, it is clear that investors shifted defensively towards the end of December, leaving those still waiting for a Santa rally disappointed.
As we now enter 2019, event risks loom over the coming 12 months, from Brexit to US-China trade talks, and a continuing showdown between President Trump and Congress. As we enter a lower growth environment, the global economic outlook has weakened, leading expectations for a difficult trading environment in the first months of the year. Based on the indications of reduced spending and lower economic growth in the final months of 2018, it is likely that data will become more negative as the performance of lagging economic indicators such as corporate earnings and employment begins to feed through into markets, resulting in a selloff in equities. The selloff is not expected to lead to a slowdown and in some areas globally a shallow recession, therefore when economies show signs of bottoming out or pricing themselves more realistically in late spring at the earliest, opportunities for returns will arise. Providing we time the re-entry point right for reinvesting into equities, we are optimistic about 2019 portfolio returns and we expect by te close of 2019 for 2018 to be a distant memory.
Market Movements Today
Evidence of slowing Chinese growth dashed hopes for an upbeat start to 2019, and European and Asian stocks tumbled today on the first trading day of the year. Safe havens including gold, bonds and the have yen all rallied. With slowing global growth and risks remaining over the next few months, Q1 of 2019 is shaping up to be a difficult period for equities, with investors moving more defensive.
Model portfolios are currently defensively positioned with high cash levels and short positions on the FTSE 100 and S&P 500. As it stands, the portfolios are benefitting from low equity exposure and high levels of diversification through multi asset funds. Given a more challenging economic backdrop in 2019, we are taking a risk-off approach before adding risk back into portfolios when we have greater certainty on key economic events such as Brexit and global trade agreements.
Key events in the coming days
- US December jobs report on Friday
- The American Economic Association annual meeting: Powell is interviewed alongside predecessors Yellen and Bernanke on the future of Fed policy on Friday.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last 10 days of 2018 we saw most of the indices that we track fall, with the exception of the UK markets which ended the final period of the year slightly higher following volatile trading on what can only be put down to noise. The US fell significantly and then rose again over the period despite renewed optimism over a trade deal in the last days of 2018 following a December rate hike from the fed. The rest of the world has followed lower, with the sharpest fall coming from the NIKKEI 225 index following weaker Asian data towards the end of the year.
The model portfolios have declined marginally over the period where the indices have experienced larger decline. Now we have de-risked the portfolios, we aim to have more stable returns over the period when the equities remain volatile. This is evidenced when we look at the 1-month performance against the benchmark, which shows the impact de-risking the portfolios has had in stemming losses when the markets fall. Over the next month we expect equities to continue to fall, at which point the shorts within the portfolio should help to generate returns. All models are now over al time periods beating the benchmarks and that will continue unless of course the markets rally, That could happen in the short term but as data continues to disappoint the momentum and drive is for negativity to continue driving down prices.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1968, Dr Christian Barnard performed the first successful heart transplant on Louis Washkansky, a 54 year old grocer with incurable heart disease. The operation paved the way for medical advancement in the area of cardiology.
As always have a wonderful week and stay safe.