Over the course of the last 50 years, U.S. equity market returns during the month of December could reasonably be characterized as either being mildly beneficial to overall full year performance or perhaps a more benign period of supporting market stability as the calendar year concludes. Very clearly in 2018, this is not the case, with the ‑12.35% return for the S&P 500 from November 30 through December 21, reported as one of the worst performances since the Great Depression in 1931. The S&P 500 has dropped by ‑16.68% since September 30, 2018, and we are likely to have the first full year loss for the S&P 500 since 2008. Smaller stocks, as measured by the Russell 2000 index, have dropped by ‑23.62% since September 30. International markets have also fallen, with the Morgan Stanley All Country World Index, ex-US, dropping by ‑12.31% for the same time period.
We acknowledge that the almost daily drops in market prices can be unnerving, with headlines of all types fueling increased volatility. From the U.S. Federal Reserve Chairman Powell’s particular, awkward, choice of words to describe the Federal Reserve’s monetary policy, concerns about the current trade tensions with China, investor expectations about more modest 2019 earnings growth and slowing demand in the high yield credit market, to the unpredictable daily policy and personnel changes from the Trump administration, the markets are currently besieged by a seemingly endless supply of negative data points. On Friday, December 21, the White House decision to reject a bi-partisan Continuing Budget Resolution on the issue of funding for Trump’s desired Mexican Border Wall, led to a government shutdown. This shutdown and the resignation of Defense Secretary Mattis, amplified by Trump’s decision to make that resignation effective by year end also contribute to this day by day, hour by hour market anxiety.
As we seek to constantly separate meaningful market signals from “noise” (however relevant), our economic analysis indicates that the U.S. economy is at least a year away from recession; we believe that we are seeing an economic slowdown, not a recession, and that the drops in the market are similar to the market behavior in the second half of 2011 and during the 12 months from July 2015 to July 2016. In both cases, we saw increased volatility and declines in most sectors of the market, followed by a rapid recovery. Indeed, GDP growth for the United States is currently at a 3.4% annual rate, with growth estimated at over 2% for each of the next six quarters. We are well aware that both consumer and business sentiment can change quickly, but we believe that current economic growth in the U.S. is both solid and well-supported by consumer and small-business sentiment.
Absent an economic recession, we believe that this will not be a sustained bear market. We also believe that without a recession, there is substantial risk to being too defensive and being out of the stock market. We are constantly monitoring client portfolio positions and have made adjustments during the past six months to reduce holdings in what we believe are the most cyclically exposed companies, increasing holdings in companies with more stable earnings, dividend support and leadership on environmental, social, and governance issues. We do not believe that reducing overall equity exposure is appropriate at this time, given the slowing, but still solid economic growth in the U.S., the Eurozone, and China.