Market Review 2018


2018 Market Reviews

The markets’ upward year-end momentum carried strongly into January, carrying stocks to a sharp advance that lasted for most of the month. Economic news and corporate earnings were reasonably good, though not exceptional. Toward the end of the month, however, the market changed direction. Stocks fell back in the month’s final couple of days, a decline that intensified during the initial trading days of February. The change in direction may have to do with an uptick in interest rates, which in turn seems to relate to concerns over the likelihood that the new tax law will result in a substantial issuance of US Treasury securities, and with it, the possibility of a resurgence in inflation. Through January 31, the S&P 500 index returned +5.73%. (It has subsequently given back this entire gain.) The Mid-cap 400 index returned +2.87%, and the Small-cap 600 index returned +2.53%. Growth outperformed value in all market capitalization ranges. [Index returns: Standard and Poors]

International stocks drifted a bit higher; the MSCI EAFE international equity index returned +1.20% in local currencies. The US dollar fell sharply against other currencies, possibly due to those inflation worries, and perhaps due in part to the peculiar comments the US Treasury Secretary made at the World Economic Forum in Davos, where he suggested that a weaker dollar would be good for US business. The dollar fell to 109.31 yen from 112.69 a month earlier. It also weakened to $1.2428 against the euro and $1.4190 against the pound Sterling, from year-end levels of $1.2022 and $1.3529, respectively. The currency movement was strongly favorable for US investors, and EAFE returned +5.02% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release.]

Interest rates moved sharply higher during January. In addition to worrying about inflation and a large increase in Treasury issuance, market participants also took note of signals from the Federal Reserve that it would continue to pursue a policy of monetary tightening under its new Chair, Jay Powell. The yield on the two-year US Treasury note rose to 2.14% at the end of January, from 1.89% at the end of December. The ten-year yield rose by a similar amount, ending January at 2.72%, compared to 2.40% a month earlier. Because of the rise in rates, the Bloomberg Barclays US Aggregate Bond Index returned –1.15% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]