Almost nothing paid off for investors in 2018, as the bull market headed to the slaughterhouse

Stock prices can be seen on screens at the Nasdaq stock exchange in New York City's Times Square.

Dec. 30, 2018 6 AM PT

Reporting from Washington — In 2017, nearly everything investors touched made money.

Major stock indexes were up about 20% or more. Bonds turned in another solid year of gains. And the housing market was sizzling, with median home prices in Southern California up 8.2% from a year earlier to top the bubble-era high reached in 2007.

This year was looking to be even more promising. After all, big new tax cuts kicked in on Jan. 1 and were supposed to provide what President Trump called “rocket fuel” for the U.S. economy. Analysts expected that would help push an already soaring stock market to new heights.

Instead, 2018 has been a dud for investors across the board.

All the four major U.S. stock indexes declined at least 4.6% for the year through Friday — and they’re poised to all finish with negative annual returns for the first time since 2008. And the poor performance was broad-based: nine of the 11 sectors in the benchmark Standard & Poor’s 500 index are in the red for 2018.

As interest rates rose, bond returns fell, with one benchmark fund down about 3%. Gold didn’t fare much better. And don’t talk about Bitcoin, the cryptocurrency whose value plummeted by nearly three-fourths.

Even residential real estate markets have slowed and, in some parts of the country, gone into decline.

For the first time in years, the best annual returns came from keeping your money in cold, hard cash and holding it in savings accounts, money market funds or certificates of deposit that have seen their interest rates rise from rock-bottom levels.

Just stuffing cash in the mattress, where its buying power eroded by the approximately 2% annual inflation rate, would have beaten the 7% loss incurred this year from a fund tied to the S&P 500.

The long bull market now is close to the slaughterhouse. The year ended with wild weeks of financial market volatility triggered by worries about the U.S.-China trade war, a slowing global economy, unforced errors by the Trump administration, the turnover of the House majority to Democrats, a partial federal government shutdown and worries about a U.S. recession.

“If you go back to last December, shortly after the tax package was passed, people looking ahead to 2018 felt universally bullish,” said Patrick Schaffer, a global investment specialist at JP Morgan Private Bank in Los Angeles.

“Now, at the end of 2018 looking ahead to 2019, there are very few reasons to be optimistic,” he said.

Wall Street is close to a bear market — defined as a sustained decline of at least 20% from recent highs. That often is a precursor of a recession. Economists said the risk of a recession in the next couple of years is rising as the recovery from the Great Recession is 9½ years old, the second-longest in U.S. history.

But just as 2018 didn’t turn out as anticipated, next year also could provide surprises.

A full-fledged bear market might not develop in 2019, analysts said. And the big stock declines at year-end pushed major indexes lower than warranted by still-solid corporate earnings and economic conditions, opening the door for gains next year.

The estimated price-to-earnings ratio for S&P 500 companies over the next 12 months — a key gauge of stock valuations — has declined in recent months and now is just below the 10-year average.

The major U.S. stock indexes ended the year a far cry from the records they hit in the late summer and early fall. The Dow Jones industrial average has declined 14% from its Oct. 3 all-time high, while the S&P 500 has fallen 15% from the record level it hit less than two weeks earlier.

The technology-focused Nasdaq composite is teetering near bear-market territory, down 19% from its Aug. 29 record close, as big Silicon Valley names such as Apple Inc. and Facebook Inc. saw their share prices battered over the last few months.

All three of those indexes are officially in a correction, which is a decline of at least 10% from a recent high. The Russell 2000 index of smaller company stocks is already in a bear market, off 23% from the all-time high it reached on Aug. 31.

Much of the stock market’s problems have emanated from Washington, where Trump’s policies and erratic style have fueled investor concerns about the economy, trade relations with China and the cherished ability of Fed officials to make monetary policy decisions independent of political ramifications.

“The biggest single problem for the stock market is the president,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note on Thursday.

Stocks had a fantastic 2017. The Dow gained 25.1%, the S&P 500 was up 19.4% and the Nasdaq soared 28.2%. Trump made sure everyone knew about it, frequently touting the gains on Twitter and in speeches.

“The stock market is smashing one record after another, and has added more than $7 trillion in new wealth since my election,” Trump boasted in January to corporate and political leaders at the annual World Economic Forum gathering in Davos, Switzerland.

But trouble was brewing on Wall Street.

The Republican tax cuts, which included slashing the corporate rate to 21% from 35%, were a rare injection of fiscal stimulus into a solid economy already at full employment. Then Trump signed a two-year budget bill that added even more stimulus by boosting spending about $400 billion more than planned.

Those moves raised fears the economy would grow too fast while also increasing the already large federal budget deficit. They led the Fed to raise interest rates more quickly than anticipated to head off high inflation.

Stock prices turned negative in February. After never dropping 1,000 points in a trading session in its 122-year history, the Dow plunged that much twice in four days. The Dow, S&P 500 and Nasdaq all saw declines of about 10% from highs they had reached just days before.

Then, in March, Trump launched a trade war with China by unveiling the first of a series of tariffs on imports from there. China responded with its own retaliatory tariffs on U.S. goods.

Still, after a volatile February and March, investors calmed down. Stocks climbed to new record highs through the spring and summer as Washington and Beijing worked to resolve their differences.

But as autumn set in, so did investors’ jitters.

Trump was publicly criticizing his hand-picked Fed chairman, Jerome H. Powell, for the central bank’s interest rate hikes. The China trade dispute escalated. And economic growth in the United States and abroad began slowing.

The Democratic takeover of the House in the November midterm elections raised the prospect of more Washington dysfunction with a divided government. Those concerns played out this month with a partial federal government shutdown after Democrats balked at Trump’s demand for $5 billion to build a border wall with Mexico. He had promised repeatedly during his 2016 campaign that Mexico would pay for the wall.

“I think that the showdown over funding for the border wall is just an example of what we might expect in 2019 with this Congress as we head into a national election in 2020,” said Michael Arone, chief investment strategist at asset manager State Street Global Advisors. “This bipartisan bickering is raising concerns about whether a divided government can handle important issues. It’s looking less and less likely.”

He called the resulting effects on stock prices “the discord discount.”

The Fed has been undaunted in its efforts to stay above the discord and bring interest rates back to normal after holding them down for years and buying financial assets to boost the economy during and after the Great Recession.

The tax cuts boosted U.S. economic growth to a strong 4.2% annual pace in the second quarter of the year. But that could be the high point of the stimulus.

Growth slowed to a 3.4% annual rate in the third quarter and forecasts call for it to slip further to a still-solid 2.5% in the fourth quarter. Fed officials this month forecast 2.3% growth next year.

Another small Fed rate hike on Dec. 19 freaked out investors as central bank officials indicated they would continue with their efforts to normalize monetary policy even as economic growth was slowing. The week before Christmas went down as the worst week for the Dow since the 2008 financial crisis.

Trump added to the turmoil with more unprecedented public criticism of the Fed amid reports that he had discussed whether he could fire Powell. Fed officials can only be fired “for cause,” and most experts said a dispute over monetary policy probably would not fit that definition.

Trump administration officials tried to tamp down the concerns, declaring Powell’s job was safe. And Trump gave the stock market a vote of confidence on Christmas Day. “We have companies, the greatest in the world, and they’re doing really well,” he told reporters. “So I think it’s a tremendous opportunity to buy.”

But as the partial government shutdown is set to extend into the new year, investors should be prepared for more chaos.

If markets keep slipping, the plunge could worsen significantly and consume the new year. Stocks have declined an average of 30.4% in bear markets since World War II, according to analysis by Goldman Sachs and CNBC. Those bear markets have lasted an average of 13 months, and after hitting bottom, it has taken an average of 21.9 months to recover.

“The market tends to recover those bear market losses within a handful of years,” said Greg McBride, chief financial analyst at Bankrate.com, a financial information website. “Selling into a downturn is a strategy sure to be filled with regret.”

Fortunately, keeping your money in cash isn’t a bad move these days after years of low interest rates.

The average one-year CD is paying 0.89% — more than double what it did a year ago — with the highest yield at 2.9%, according to Bankrate. A year ago, the best you could get on a one-year CD was 2%. Money market and savings accounts are paying as high as 2.4% interest.

“It’s the first time in a decade that savers can actually earn a rate of return that’s ahead of inflation,” McBride said.

Holding off on new investments also can leave people ready to pounce when opportunities develop, Schaffer said. “It’s important for investors to think about having the ability to be more tactical, which ultimately means you have to have some more liquidity to capitalize as prices swing too far one way or the other,” he said.

Schaffer suggested investors look toward sectors that are less dependent on economic growth. One such area is healthcare, which will continue to be in demand as the population ages, he said. Healthcare has been the best-performing S&P 500 sector index this year, up 3.3% through Friday.

As the long bull market nears its end, Arone said investors should consider focusing on quality over growth by looking for companies with stable earnings and strong profit margins. A good place to look, he said, is the S&P 500’s Dividends Aristocrats index, which tracks companies that have increased dividends annually for the last 25 straight years. Those firms include AbbVie Inc., 3M Co. and Walgreens Boots Alliance Inc. Shares of all of them, like the index itself, are down at least 5% for the year. But each company returned a higher percentage of its stock price in annual dividends to shareholders this year — at least 2.6% — than the 2.1% figure for all S&P 500 companies.

Corporate earnings were strong this year, with an estimated 20.3% growth rate for S&P 500 companies, according to FactSet Earnings Insight. That would be the best performance since 2010. The forecast for next year is lower, at 7.9%. Still, Arone said the United States has never fallen into a recession while corporate profits are still growing.

Given the recent volatility, investors might just want to sit tight, McBride said.

“Trying to time the market means being right not once but twice. You have to know when to get out and you have to know when to get in,” he said. “You’re better off tightening the seat belt and holding on.”

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Twitter: @JimPuzzanghera