The S&P 500 lost momentum in the final weeks of 2018 preventing what was developing into another record-breaking year. Instead, markets recorded the first year of negative returns since 2008. Since February, market sentiment seemed to reflect indifference to adverse news, especially in the context of lower corporate tax rates. In early October, investors lost confidence and reacted sharply to reductions in economic growth forecasts, higher interest rates, and uncertainty about the global effects of arbitrary trade tariffs.
Market volatility is more than likely to continue into the New Year with increasing computer-generated trading and the proliferation of exchange traded funds. Comparisons to the markets of 2002 and 2008 have become recurring headlines. However, to put current events in perspective, the opening line of our 2008 year-end review began with “the best that can be said about 2008 is that it is over”. We have come a long way since that period of failed financial institutions and government intervention.
The decade since those difficult years demonstrated remarkable and uninterrupted economic growth averaging well in excess of 2% annually. While early growth forecasts for 2018 were an optimistic 3.2%, in our opinion the recent reduction in expected growth has caused an overreaction in the market. However, ongoing volatility indicates that the market is still adjusting to valuation calculations based upon lower average economic and corporate earnings growth expectations in the year ahead.
Consumer spending drives the economy and is expected to continue to do so as we begin the New Year. While a slowdown is a reasonable expectation following ten years of higher than average growth, unemployment is at a historically low level of under 4%. Interest rates have been increased by the Federal Reserve, but current levels are low by historical standards. Inflation pressures are modest, and the yield curve remains flat which indicates that inflationary concerns are not pushing up long term interest rates. The positive side of higher interest rates is that money market funds are finally offering more competitive rates of return.
While probability suggests that corporate earnings are likely to decelerate in 2019, there is little evidence for a recession in the coming year. There are attractive investment opportunities in the consumer, technology, and health care sectors which will continue to form the core holdings of portfolios managed by Penobscot. We are steadfast in our long-term investment focus on market-leading companies with global operations, strong balance sheets, and consistent records of earnings and dividend growth. As another year begins, we reaffirm our commitment to common stocks, patience, and realistic expectations as the best combination for long term capital appreciation and income growth.
Helping you achieve your financial objectives is our highest priority. In so doing, we wish you a peaceful and prosperous New Year.