When it rains it pours…
December was a historic month for stocks, and not in a good way. As the storm began to clear out and we rang in the New Year, we were left with the worst December for stocks since the Great Depression, and 2018 ended up being the worst full year for stocks since 2008. For only the second time in a decade, major US stock indexes closed the year lower than they started.
So, what happened?
There were several factors throwing a wrench in things last month. The Federal Reserve continued to raise short-term interest rates – something short-sighted stock investors do not like one bit, but something that ultimately tends to come as a result of continued strong economic growth. That said, there are indications that the Fed may ease up on its plans to continue raising rates in 2019, due to several economic indicators showing we “might” see growth slow globally this year. The combination of immediate rate increases and forecast of those increases slowing down in the near future caused a bit of a panic.
More drama in D.C.
With a shift of congressional power on the political horizon, a stalemate on the issue of immigration ultimately led to a partial government shutdown, that has now become the longest in US history. On top of that, trade negotiations with China hit several snags, leaving markets unclear on the longer-term global economic impact of the ongoing trade war. Uncertainty and a lack of confidence in Washington became yet another catalyst to accelerate the selling as the storm strengthened.
In years where stocks are down as December arrives, investors often accelerate those declines by selling shares in their taxable investment accounts (not 401ks or IRAs) to lock in losses, which can help to offset their tax liability for the year. For the first time in years, what’s known as tax-loss harvesting, may have also played a role in the sell-off.
It’s tough and frankly kind of pointless to read too much more into the causes of these pullbacks, as things change so quickly that by the time you think you’ve figured it out, there’s a new reason tempting you to buy or sell. Our stance remains the same – Do whatever you can to ignore these events and do not let them tempt you to run away from investing. As an investor, severe pullbacks like we’ve experienced recently are maddening and discouraging, but just a little extra context can help all of us remember the bigger picture, and it’s quite a beautiful one.
As we officially entered into what Wall Street calls a “Bear” market (decline of 20% or more from a previous high) last month, just remember that every “Bear” market in our history has been followed by a “Bull” market. This proves why it’s so important to be the patient investor that views these times as opportunities. We’re here to not only remind you of that, but also to make sure you stay on track and have someone to talk you through the frustration. Stay calm during the storm!