Making Sense of 2018

Jan 30, 2019 | Alan MacDonald


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Here are the results from around the world in 2018 was a tough year for markets, including the fixed income markets (preferred shares in particular).

 

Here are the results from around the world in 2018 was a tough year for markets, including the fixed income markets (preferred shares in particular). The 2018 results for the three market indices we track and the preferred share index were:

 

TSX (here in Canada) -11.6%

S&P500 (United States) -6.2%

MSCI EAFE (the rest of the world) -16.5%

Cdn. Preferred Share Index -12.21%

 

Our Observations

2018 was one of the truly great years in the history of the American economy, and a good one in the Canadian economy; and by far the best one since the global financial crisis of 10 years ago. Paradoxically, it was also a year in which the equity markets took a tumble.

It is almost impossible to cite all the major metrics of the economy which blazed ahead in 2018. Worker productivity, which is the long-run key to economic growth and a higher standard of living, surged. Wage growth accelerated in response to a rapidly falling unemployment rate. Household net worth in the States rose above $100 trillion for the first time. Unemployment in Canada was low all year, and for the first time in American history, the number of open job listings exceeded the number of people seeking employment.

Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%. Canadian corporate earnings increases were a more modest 6%.

But the equity market had other things on its mind. Having gone straight up without a correction throughout 2017 in the U.S., and a flat year in Canada — markets then decided to take a break in their upward climb.

There ensued in February a 10% correction in the U.S. and a 9% correction in Canada. The advance resumed as summer waned, with the S&P500 Index reaching a new all-time high of 2,931 in late September. The markets then gave way to a second correction falling to the threshold of bear market territory: on Christmas Eve, off 19.8% from the September high. A rally in the last week of trading carried it back up, but we still all have experienced a substantial decline in all markets for 2018. 2018 has become the tenth year of the last 39 (beginning with 1980) in which the Index closed lower than where it began… At the long-term historical rate of one down year in four, which is actually just par for the course.

Trade and other uncertainties—perhaps chief among them Fed policy and an aging expansion— were weighing heavily on investor psychology as the year drew to a close. Our experience has been that negative investor sentiment—and the resulting equity price weakness—have usually presented the patient, disciplined long-term investor with enhanced opportunity. As Warren Buffett wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.”

On Investing

It’s probably worth restating, after such a year, our overall philosophy of investment advice. It is goal-focused and planning-driven, as distinguished from an approach that is market-focused and current-events-driven. Every successful investor we have ever known was acting continuously on a plan; failed investors, in our experience, get that way by reacting to current events in the economy and the markets.

We do not attempt to time the markets, nor predict which market sectors will “outperform” others over the next block of time. We have always found being planners rather than prognosticators to be most useful. We will guide your portfolio along the path of the recommended plan, ensuring that we take advantage of volatility as it is presented and managing the required cash flows to your household.