After a strong finish in the third quarter, stocks suffered their biggest quarterly decline since 2011 to end the year. The S&P 500 Index fell 13.97% with energy being the worst performing sector, falling nearly 25% as WTI crude oil plunged 38%. As in a typical stock market downturn, the 10-year Treasury Bonds rallied in the quarter, sending its yield down to 2.69% from 3.06% at the end of Q3.
As I have written recently, I believe the main factor behind the deep Q4 drawdown were Fed Policy mistakes. Playing second fiddle were concerns with US-China trade tensions and federal government shutdown.
Hawkish Fed commentary throughout the quarter, including Fed Chair, Powell’s, remarks in early October about how the Fed is still “a long way from neutral”, kicked off the stock selling. After the Fed raised rates a quarter of a percent in December, Powell’s, less hawkish, remarks weren’t enough to quell the markets, which continued their downward path through the holiday.As of this writing, the markets have begun to recover their losses, and again seem to follow every word of Fed Chair Powell who comments have recently taken a dovish, market friendly, tone.
Today’s market reminds me a lot of the 1994-1995 time period. In 1994 the Fed, under Fed Chair Greenspan, was raising rates consistently and that drew the concern of stock investors as reflected by the wide swings in the stock market throughout the year. Stocks bottomed in December of 1994, upon confidence that the Fed was done raising rates. That bottom held and stocks rallied strong in 1995, and low and behold, the Fed actually cut rates in June of that year. While I’m not suggesting the Fed will cut interest rates in 2019, I do believe with the Fed’s less aggressive tone and a stable economy, we may very well have seen the bottom of this stock market correction.
While volatility is difficult to stomach, unless your needs have changed, I believe it is wise to stay the course because the economy is on sound footing with low inflation. I view the recent downturn as a correction that will eventually run its course and provide opportunities to invest.
Again, thanks for your confidence. Please reach out if you have any questions or if your financial situation has changed and might impact your investment strategy.