December 31, 2018
A December to Remember
When it comes to the stock market, December proved to be anything but merry. It was the worst on record since the Great Depression. In our view, the investing environment was one that felt like death by a thousand cuts. While no one cut on its own was fatal, the compounding effect turned serious. An escalating trade skirmish, a Brexit standoff, slowing global growth and a slew of critical tweets about the Federal Reserve took their toll along with $12 trillion in global stock market value, the largest market cap loss since 2008.
You know investing conditions are tough when gold leaves stocks in its dust. The commodity rose +4.7% for the month while all major indices were in the red and several even crossed into bear market territory. To that same point, in the United States as well as the European Union, two of the most defensive sectors—Healthcare and Utilities—were the best performing for the year. Stocks in those areas tend to hold up in difficult economic cycles because their products or services are essential. In the U.S., they were the only sectors to end the year in the black with Healthcare returning +4.69% and Utilities barely up +0.46%. And while these sectors finished in negative territory in the EU, they still outperformed everything else—with Utilities down -2.11% and Healthcare down -2.67%.1
We continue to believe the underlying fundamentals remain strong in America—especially when one considers this year’s robust holiday retail sales, buoyant consumer confidence, incredibly low unemployment rate and rising level of workforce participation—all underscored by strong corporate balance sheets. That said, we also know a strong environment can easily be undone by self-inflicted wounds. To this last point, the UK’s vote to exit the EU is a clear example of a decision whose true outcome and impact remains both ominous and uncertain.
While the market’s comeuppance was inevitable, the swift and steep decline during what has historically been an uneventful month, re-awakened recollections of the financial crisis. In so doing, some are projecting a repeat of the catastrophic atmosphere that shook the financial markets to their core. By contrast, we believe 2008 was a once-in-a lifetime meltdown that would be hard to replicate given the structural changes now in place. In the meantime, the fears and volatility that have re-emerged create a fertile backdrop for bargain shopping. As our investors know well, we play long ball at Ariel and do not get caught up in the drama that whipsaws the markets. Over the long-term the market’s trajectory is upward but over the short-term, anything can happen. Accordingly, we will continue to follow our disciplined, patient investing approach and do our best to position our portfolios to withstand that which we cannot control, while always driving towards an ever elusive finish line.
Past performance does not guarantee future results. The opinions expressed are current as of the date of this commentary but are subject to change.
1Sector performance of the STOXX Europe 600.