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US Equity Market Returns            Q4            LTM

S&P 500 (Largecap)                      - 13.7%     - 4.9%

Russell 2000 (Smallcap)               - 20.3%     - 11.4%

Nasdaq 100 (Tech)                       - 16.8%      - 0.7%

Summary

  • US Federal Reserve increased interest rates again
  • Expected growth forecasts are revised down
  • Federal Government shuts down over funding standoff
  • US Equity markets reverse previous gains to end the year down

US Federal Reserve (FED) increased interest rates again by 0.25% during the period, bringing the FED funds rate to an upper limit of 2.5%.It capped a total of 4 hikes over the course of the year, which was a slight acceleration relative to 2017 where we saw 3 hikes, and markedly faster than 2015 and 2016 that only saw 1 hike each. The FED was responding to: a very strong jobs market; building signs of inflation; very strong corporate earnings; and a large fiscal stimulus put in place by Donald Trump.

Expected growth forecasts are revised down by the FED and a more moderate outlook is signalled.  The FED publishes in its minutes what has become known as the “dot plots” where each member records what they believe the path of interest rates will be in the future. This gives the market very useful information and, as you would expect, investors follow its release very closely. In the December publication, the average number of rate hikes expected in 2019 fell from 3 to 2 and growth expectations were revised down for 2018 and 2019. Given their assessment of a weaker growth outlook the market was buoyed by the expectation of fewer rate rises (less tightening) – in fact the market is now pricing in no more hikes at all in 2019 which would be very supportive for growth.

Federal Government shuts down over funding standoff for Donald Trump’s border wall with Mexico. Historically, US government shutdowns are short-lived as feuding sides are forced to the table to negotiate in order to prevent the shutdown of important Federal functions such as: FBI agents; the coast guard; food inspectors; NASA; air traffic controllers; and even (ironically) border patrol staff. This time however, the spending bill was agreed by all parties – except for the $5.7bn request by Trump to fund the border wall – and Trump is digging his heels in. The longest previous shutdown was 21 days in 1996 but, at the time of writing, this had overtaken it to become the longest ever, with no obvious signs of either side backing down.

US Equity markets reverse previous gains to end the year down. At its highest point it had risen over 11% but gave up these gains in spectacular fashion in Q4, to finish down more than 4%. Despite the strong US economy and corporate earnings, it seems that the trade dispute with China, quantitative tightening (the reversal of quantitative easing, QE), a hawkish Federal Reserve and slowing global growth were too much for the market to take. Once a bearish mindset is formed it is difficult to shake and it can become a self-fulfilling prophecy. By the very end of the year however, markets seemed to have bottomed with relatively attractive valuations.

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett