It was difficult to make money in 2018. The equity markets experienced their worst year since 2008, and had their worst December performance since 1931, despite a furious rally the last week. The bond market, facing rising interest rates all year, was negative most of the year until a December rally left it even for the year. Global stocks fared worse that U.S. stocks as questions about world wide economic growth rates hung over markets around the world.
We have talked a lot the past year about the record setting bull market that started back in 2009. In December of this year, the S&P 500 dropped 19.8% from it’s high, just short of the 20% needed to be considered a bear market. Technically, the bull market lives on, although it’s on life support. Many markets and individual stocks are well into bear market territory, and it seems likely that the rest of the market will follow. It is worth noting that even with the pullback in stock prices, the market remains expensive relative to earnings. To become more reasonably priced, we will need to see further market drops and/or increased corporate earnings, which, based on current forecasts, is increasingly unlikely.
We reduced our equity exposure a year ago based on our expectations of potential selling in the equity markets. While this doesn’t eliminate the pain of market drops, it does leave us well positioned to buy back into stocks as the market gets more attractive. Even with the large fourth quarter drop, we do not feel that stocks are yet attractively priced. At this time, we continue to be cautious investors.
With the struggling capital markets and slowing global growth rates, there are the inevitable questions as to whether we are facing the prospects of an economic recession. While rising interest rates and the global problems are a concern, we feel it is too early to know if we will see a recession. Interestingly, a recent study by Dr. Davis Kelly found that, since 1948, recessions in the U.S. have become less frequent and milder as our economy has gradually stabilized. Recoveries have also become weaker as the overall pace of economic growth has slowed. This has been caused by better inventory management by U.S. corporations, less disruption from big swings in government spending, and the increasing rise of the service economy, which is more stable than traditional manufacturing.
We here at Wabash Capital would like to bid a fond farewell to Chris Doll, who is leaving Wabash Capital and the investment industry to work with a new start up business. Chris was one of the founders of Wabash Capital back in 1997, and for the past few years has worked in our retirement and fiduciary businesses. Please join us in wishing Chris well as he embarks on his new career.