In a year that started with so much promise, December capped off a fourth-quarter that ended with a thud as the market was faced with too much uncertainty. You would have thought we entered a recession given the sharp rise in volatility. However, while the Trump administration began 2017 with market-favorable plans, 2018 saw a shift to policies that were mainly market negative. Pending trade wars, a government shutdown, talks of firing what is supposedly an independent Federal Reserve Chairman, and the Federal Reserve (Fed) raising interest rates were the main hindrances. Add to this Treasury Secretary Mnuchin making ill-advised statements right before Christmas and you have a recipe for market volatility right into the end of the year. It was too much uncertainty for the markets to digest.
Volatility spiked, international markets suffered double-digit losses, and U.S. markets from peak to trough fell 20% towards the end of the year. As 2018 ended we found equity prices starting to look attractive at their lows. We were a few percentage points away from taking advantage of the market drop. However, the market rebounded before we reached that adjustment point. Markets have a way of retesting lows so we may get our chance sometime this year. Overall, we ended the year with a favorable economy and labor market.
As we head into 2019, retail sales are strong, industrial production is still expanding, confidence levels are high, and wages and job creation are growing across the board. However, as we have addressed in the past, we expect the economy to start showing signs of maturing.
Industrial production is still growing, but the rate of growth should begin to slow in the first 6 months along with retail sales. This will impact GDP growth, with our target coming down to 2% for 2019 versus 3% in 2018. We expect a slowing economy but not a recession. In 2019 we anticipate positive returns, however could see upside gains limited due to unresolved issues with China and ongoing political risk in Washington. Because wage inflation is an issue, we expect the Fed to hike rates one or two more times in 2019 which should be considered a headwind.
Our diversified portfolios performed very well last year considering the market volatility, and we expect them to continue to do so. We will be making equity and fixed income adjustments in the first quarter of 2019 to address the changes on the horizon and prepare the portfolios for the planned maturing of the economy. As always, we appreciate your trust.
Marc Henn, CFP®