https://www.nytimes.com/2019/01/11/business/market-swoon-investors-seek-safety.html After rising for nine years in a so-so economy in the belief that prosperity was just around the corner, stocks swooned, even as growth picked up.
That left many investors wondering whether the economy is turning another corner into a place where danger, maybe even a recession and a prolonged bear market, lurk.
The S&P 500 dropped 13.5 percent during the fourth quarter, including dividends, giving the index a 4.4 percent loss for the year by that measure. It was the worst performance since 2008, despite strong corporate earnings and the best readings in several decades in unemployment and consumer confidence.
As 2019 unfolds and the economic picture becomes clearer, it is possible that stocks will have a sustained, orderly recovery, investment advisers say. But achieving that clarity will take time, so they encourage investors to demand a lot of evidence that a recession will be avoided before they commit money to stocks or other risky assets.
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“A lot of the derating that happened in the second half of 2018 started off being driven by political risk, but in the last few weeks, it has been driven by concerns about growth and stability,” said Kate Moore, chief equity strategist at BlackRock, referring to the decline in stocks. “I think that’s going to go on in the first few weeks of 2019. Everyone’s focused on economic data.”
Ms. Moore highlighted surveys showing weaker-than-expected business conditions and added: “It’s going to take time for that to work itself through the market. I would expect more volatility as we take in new data points.”
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Just how weak those data points are likely to be is hard to predict.
“The underlying fundamentals of the economy certainly have deteriorated,” said Edward Yardeni, president of Yardeni Research. He noted that the five monthly regional business surveys conducted by Federal Reserve districts “were all extremely weak in December.”
But the latest employment report was not. It showed 312,000 net jobs created last month.
“We have a very mixed economic picture right now,” Mr. Yardeni said. “It all adds up to an economy that’s slowing but probably still growing.” If that’s true, then 2019 may not be so bad for the market.
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“Stocks are very cheap, with one important qualification,” he said: “You have to believe the economy is not going to wind up in recession.”
He then offered another qualification, about forthcoming corporate earnings reports: “We still have to curb our enthusiasm because we can’t get too excited about the earnings outlook.”
The tax cuts that took effect in 2018 sent earnings up so much for the year — the latest estimate for the S&P 500 was 20.2 percent, according to FactSet Research — that a 5 percent rise in earnings in 2019, aided by corporate buybacks, is about as much as Wall Street can expect, Mr. Yardeni said. FactSet’s latest forecast is for a 7.3 percent increase.
Despite some good days for the market in January that may have been prompted by signs of flexibility from the Federal Reserve, the way stocks tumbled late in the year hardly inspires confidence. With anything like a repeat performance, investors will have to hope that other assets provide better protection than in 2018, when there were few places to hide.
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“Cash was the only major asset class that posted positive returns in ’18,” according to a Bank of America report. Even the reed-thin 1.9 percent return on cash in money market funds was less than the 2.2 percent consumer inflation rate, the report said, but at least it was a positive number. Long-term government bonds, corporate bonds and gold all lost ground, although they beat the return of the S&P 500. Oil and foreign stocks were among the investments that did worse.
The average domestic stock fund lost 14.2 percent in the fourth quarter, with specialists in natural resources, technology and financial services leading the way down. These funds dropped 6.8 percent during the year, according to Morningstar. International stock funds outperformed during the quarter, losing 10.9 percent, but trailed badly for the full year, down 13.2 percent.
Bond funds lost 0.9 percent in the quarter and 1 percent for all of 2018. High-yield portfolios were particularly weak, off 4.6 percent for the quarter and 2.8 percent for the year.
Such across-the-board weakness is rare “because what tends to be bad for one asset tends to be good for some other asset somewhere,” said Ben Inker, head of asset allocation for the investment firm GMO. “The basic exception is when there is a combination of rising rates and slowing growth. Risky assets don’t like slowing growth, and fixed income doesn’t like rising rates.”
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Mr. Inker, like many, is worried that the Fed could push a fragile economy into recession. That would be “fairly ugly for valuations” of American stocks, he said, and he would avoid them even if he were confident that a recession could be skirted. He prefers stocks and bonds in emerging markets, which are much cheaper than their counterparts in mature economies.
Mutual Funds
Highlights of mutual fund performance in the fourth quarter.
Stocks vs. Bonds
Average returns, by fund category.
12 MONTHS
4TH QTR.
+
–
–
–
1.2
1.0
13.2
6.7
%
+
–
–
–
0.9
0.9
10.9
14.5
%
%
–
5
–
2.0
5.8
14.3
6.7
1.2
15.5
2.6
13.6
21.0
%
+
–
–
–
–
–
–
–
–
–
1
2.0
6.9
9.5
11.9
14.9
16.5
17.5
18.4
19.5
%
Utilities
Real estate
Consumer defensive
Communications
Health
Financial
Technology
Equity energy
Natural resources
Leaders and Laggards
Among general domestic stock funds.
LEADERS
12 MONTHS
4TH QTR.
American Funds
College 2024
–
–
+
–
–
–
–
0.6
3.5
15.7
2.8
2.5
2.0
2.0
n.a.
%
–
–
–
–
–
–
–
–
1.3
2.3
2.7
2.7
2.7
3.3
3.3
3.4
%
Russell Inv.
Multi-Strategy
Copley
American Funds
Retire Inc. Port.
Vanguard
Wellesley Adm.
Manning & Nap.
Pro-Blend
American Funds
College 2027
Goldman Sachs
Tactical Tilt
12 MONTHS
4TH QTR.
LAGGARDS
Hotchkis & Wiley
Mid-Cap Value
–
–
–
–
–
–
–
–
19.5
23.1
25.5
10.5
23.3
31.9
23.3
34.2
%
–
–
–
–
–
–
–
–
25
Hodges Retail
A
