A look back to 2018

January 16, 2019

This past year (2018) was perhaps the strangest year I’ve experienced in my career as a financial advisor. Most importantly, it was one of the truly great years in the history for the American economy, (a significant part of our global portfolios) and not so bad for the Canadian economy. It was also by far the best year since the global financial crisis of 10 years past from an economic perspective – which, given how the equity markets ended up is a little unreal.

It is almost impossible to cite all the major metrics of the US economy which blazed ahead in 2018. Worker productivity in the US 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 rose above $100 trillion for the first time, yet household debt in the US relative to net worth remained historically low. Finally—and to me this sums up the entire remarkable year—for the first time in American history, the number of open job listings exceeded the number of persons 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%. Cash dividends set a new record; indeed total cash returned to shareholders from dividends and share repurchases since the trough of the Great Panic reached $7 trillion.

But the equity market had other things on its mind. Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674—probably somewhat ahead of itself, as it seemed to be discounting the entire future effect of corporate tax cuts in one gulp. In February a 10% correction occurred, followed by several months of consolidation. The advance resumed as summer ended, with the Index reaching a new all-time high of 2,931 in late September. It then gave way to a second correction.

The S&P500 then went into a savage decline, falling to the threshold of bear market territory: S&P 2,351 on Christmas Eve, off 19.8% from the September high. A rally in the last week of trading carried it back up to 2,507, but that still represented a solid six percent decline on the year, ignoring dividends. Two thousand eighteen thus became 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, that’s actually just par for the course.

The Canadian equity market started 2018 with the S&P TSX at 16341 on Jan 1st and quickly experienced a correction down to 15164 on Feb 12th then on July 16th peaked at 16498. The rest of the year saw all gains wiped out and fell to 14254 – ending the year down 12% from the start.

The major US and Canadian economic and market issue as the year turns is trade policy, which in the larger sense is an inquiry into the mind of President Trump. I think it fair to say, as the economist Scott Grannis recently did, that “Trump has managed to reduce tax and regulatory burdens in impressive fashion, but his tweets and his tariff threats have created unnecessary distractions and unfortunate uncertainties, not to mention higher prices for an array of imported consumer goods.”

These and other uncertainties—perhaps chief among them Fed policy and an aging economic expansion—were weighing heavily on investor psychology as the year drew to a close. For whatever it may be worth, my 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 the wise and witty Sage of Omaha (Warren Buffet) wrote in his 1994 shareholder letter, “Fear is the foe of the faddist, but the friend of the fundamentalist.” When average investors are scared and equities fall – the best buying opportunities are presented.