The Fourth Quarter Defined The Entire Year
Just as the third quarter behaved in the opposite manner as is normally experienced (positively), the fourth quarter proved to be the exact opposite as is normally seen. It will go into the record books as one of the worst fourth quarters, and December will be represented by its worst performance since 1931. Equity markets went into their fifth correction of the year in October, then settled into a trading range for all of November and the first half of December. The last two weeks of December, equities fell sharply into the Christmas break, effectively erasing all of their gains for the year.
Performance Numbers For The Fourth Quarter Were Broadly Lower
During the fourth quarter, the S&P 500 Index fell -13.52%, the S&P MidCap 400 Index fell -17.28%, and the S&P 600 Small Cap Index fell -20.10%. The hardest hit sector was energy, as oil prices declined -44.91% from October 3rd to December 24th. The S&P Composite 1500 Energy Sector Index fell -25.41% in the quarter. Other notable declines included the Dow Jones Transportation Average, down -19.09%, the S&P Composite 1500 Industrials Sector Index, down 17.77%, and the S&P Composite 1500 Information Technology Sector Index, down -17.33%. Relative strength was found in the defensive sectors. The S&P Composite 1500 Consumer Staples Sector Index fell -5.47%, the S&P Composite 1500 Health Care Sector fell -9.60%, and the Dow Jones US Real Estate Index fell -5.97%. The strongest equity sector was utilities, as shown by the Dow Jones Utilities Average, down -0.24%. For the year, only health care, internet, and utilities sectors managed to remain positive.
International Equities Also Had A Rough Quarter.
The MSCI World Index excluding the U.S., fell -12.78% in the fourth quarter, ending the year at -14.09%. The Russell Europe Index fell -13.22% in the quarter, and finished -15.04% YTD. The Russell Emerging Markets Index fell -7.18% in the third quarter to end at -14.54% YTD. The Russell Latin America Index gained +0.91 in the quarter, and finished down -7.14% for the year. Tariff talks had been experiencing progress, with Canada and Mexico signed on, Europe in negotiations, and China agreeing on no more new tariffs for six months during continued talks. As with U.S. equity markets, the weakness in the fourth quarter appeared to be more technical then fundamental, with rapid-trade computer selling taking control late in the year.
Bond Markets Were Marginal Beneficiaries Of The Declines In Equities
The Bloomberg Barclays U.S. Aggregate Bond Index rose +1.64% in the fourth quarter to finish +0.01% for the year, including dividends. The Bloomberg Barclays Municipal Bond Index rose +1.69%, finished the year and +1.28%. The Bloomberg Barclays Global Aggregate Bond Index rose +1.20% in the quarter and finished -1.20% YTD. The Bloomberg Barclays U.S. Corporate High Yield Bond Index fell -4.53% in the fourth quarter and finished -2.08% YTD. The Bloomberg Barclays 1-3 Month T-Bill Index rose +0.56% in the quarter, to close the year with a gain of +1.82%.
The most surprising aspect of the fourth quarter equity declines was they occurred in the virtual absence of negative fundamentals. The nation’s economic health remained strong with third quarter GDP at +3.8%, third quarter corporate earnings beat estimates, inflation numbers remained low, and unemployment numbers were increasingly positive. The suddenness and severity of the market declines bore all the earmarks of high frequency trading. High frequency trading first appeared in 2010, has proven difficult to regulate and control, and can significantly disrupt markets. Ultimately however, fundamentals rule the day, and we expect to see this reflected in the new year.
Edward D. Foy,
Manager, SELECTOR® Money Management
© 2019 Edward D. Foy. Sources: Bloomberg, Standard and Poor’s, Morningstar, StockCharts.