2018 Financial Markets: A Year in Transition

As the year 2018 draws to a close, here are some insights and highlights for investors to consider based on recently turbulent financial markets.

Flat-to-Negative Returns Across All Asset Classes

Bonds and other interest rate-sensitive investments, including REITs and MLPs, have struggled throughout the year in the face of repeated Federal rate hikes.

U.S. equities sold off strongly in February but then recovered over the late spring and summer to end September up around 10%, only to then give back all of that positive performance in the fourth quarter.

Global stocks have had an especially difficult year as tepid local growth and currency weakness have combined to produce negative returns for U.S.-based investors. Gold also suffered from the strong U.S. Dollar—declining in price in 2018, despite the presence of ample geopolitical and macroeconomic risks. Commodities, most notably crude oil, have had a tough year.

Strategies & Investments to Weather the Turbulence

Reducing interest rate risk and credit exposures in bond portfolios and underweighting U.S. equities helped to minimize risk for our clients. We also recommended holding cash and short-duration bonds.

Many private investments—including private equity, venture, and specialty real estate—haec performed better than publicly traded securities, given that underlying economic growth has remained robust so far. These investments are generally not susceptible to daily selloffs driven by investor sentiment, making them ideal investment strategies to diversify portfolios.

A Transitional Year

In 2018, we have seen financial markets begin a transition phase from the extraordinarily accommodative monetary policies of post-crisis years to less accommodative, more “normalized,” and sustainable policies. In practical terms, this transition period presents an upward shift in interest rates (via Federal rate hikes) and a downward shift in liquidity (via “Quantitative Tightening”).

Asset valuations, which benefited in recent years from historic low interest rates or excess market liquidity, have suffered this year as the tide shifted. This transition phase is, like most major transitions, both “bumpy” and uncertain in its likely duration.

There remains considerable disagreement among market analysts and investors regarding the number of additional rate increases the Fed will employ before pausing to let the economy adjust.

Many forecasters now expect a slowdown in economic growth in the U.S., beginning in the second half of 2019 or early 2020.

Trade conflicts between the U.S. and China continue to make headlines and provide a recurring source of economic, political, and market uncertainty. Political and geopolitical risks may figure simultaneously into the Fed’s policy decisions, consumer and business spending, and investor sentiment in the new year.

What We’ve Learned

Taking all of these factors into consideration, we anticipate that 2019 will be another year of transition for the economy and financial markets—a year not dissimilar to 2018 in terms of episodic market volatility.

In this environment, diversification should prove more beneficial in future years than has been the case in recent years. Diversification means more than just holding multiple stocks or bonds, but extends across other dimensions as well:

• Cash holdings vs. “risk” assets
• Active vs. passive strategies
• Hedged vs. market strategies
• Publicly traded vs. private investments
• Financial vs. real assets

Investors interested in learning more about our private wealth insights and solutions can visit the Curi Capital website or reach out to the Capital team directly at 919-890-0515.