2018 was a terrible year for investors across the board, and the worst since the 2009 hangover following the 2008 crisis. Either negative investment returns or unchanged performances were experienced across the board.
The main US market indicator, the S&P 500, just missed dropping into technical bear market territory after it plummeted from its closing high in September to its closing low on Christmas Eve, or a drop of 19.8%. In sum, the S&P 500 dropped approximately 9.7 percent on the year.
This late drop was even worse than the slip in 2011. Even amidst the global financial crisis of 2008, government bonds and gold held steady, and in 2015, when a huge amount of asset classes ended in the red, Treasuries sputtered out positive returns.
What Led to the Financial Plummet in 2018?
Markets can drop for relatively simple or mundane reasons, and it can be hard to exactly pin down what causes the markets to fall.
Analysts claim that much of the last decade’s bull market in risk assets was connected to the Federal Reserve stimulus implemented to save the economy during the financial crisis. Low rates and other softening measures energized a boom in stocks by allowing companies to borrow and aggressively buy back their own shares. Ease of borrowing also fueled their expansion.
Hence, a lot of the easy money shot into the system worked its way into stocks because there was no other alternatives, and equity valuations were raised to high levels.
Said process is now winding down, and when the Fed raised interest rates by a quarter point at the end of 2018, markets turned especially weak. What is more, Fed chief Jerome Powell claimed that the slow down of the central bank’s balance sheet would continue at its current pace.
What Can Investors Expect in 2019?
Investors are now facing not only the prospect of not receiving gains, but also losing significant sums of money. The Russell 2000 and the Nasdaq Composite also both fell into bear market territory at the end of 2018.
Analysts claim that the truest test for the market will be when investors inspect their 401(k) balances and see the negative returns. This could leading to investors dumping stocks further, and putting more pressure on the market.
But what happens if the Fed backs down and the market shifts strategy again? From that point of view, the most interesting price may be that of the US dollar, as measured by the dollar index.
US markets peaked in 2018, and then fell, then peaked, and then fell again. At the same time, the US dollar picked up greatly from mid-April as investors started to see that the Fed has become much more aggressive than previous years. In the last few weeks, the dollar has shown signs of turning around, and the index has fallen from a recent high of above 97 towards the 95 neighborhood.