This was the year the long, seemingly endless bull market came to a crashing halt–and U.S. investors finally, for the first time since 2008, experienced the normal definition of a bear market (down 20% from the S&P 500’s all-time high on September 20). The bottom fell out in the final month of the year, which started with a decent chance of another year of overall annual gains, and ended in disappointment.
Looking back, it was a strange investment year in many respects. First, the markets endured two major beatings–from late January to early February, and again from early October and especially through December. Christmas eve notched the worst market drop on record in terms of actual dollars. The S&P 500 index registered the worst December performance since 1931. This will be the first time since 1948 that the S&P 500 index rose in the first three quarters and then finished the year in the red.
Meanwhile, for unlucky investors in cryptocurrency Bitcoins, the year’s investment news may have rivaled the crashing of the famous Dutch Tulip craze. The entirely-made-up currency, backed by no government or pool of assets, dropped from a high of $20,000 per “coin” down to $3,800.
Many investment professionals had been expecting a bear market much sooner than this. Bear markets tend to occur about every 3.5 years, and there have been 32 of them since 1900. So far the current decline of just over 20% pales in comparison with the 86% drop in the 1930s, or the 57% drop from 2007 to early 2009. But there is no reason to imagine that we are at the end of the current down cycle. With the government shutdown, trade wars, a rapidly growing federal deficit, political uncertainty and the ever-looming possibility of a recession, investors are understandably nervous about the near-term future.
Longer-term, a recession may be the biggest concern. Most economists are reluctant to predict an economic downturn when unemployment is at record lows, but there were some warning signs in December. Five Federal Reserve regional factory indexes all dropped in unison in December, the first time that has happened since May 2016. There are increasing signs that many factories are suffering from the uncertainty around U.S. trade policy, including tariffs on imported steel, aluminum and about $250 billion of Chinese products. At the same time, consumer confidence has fallen to its lowest level since July, and a measure of the employment outlook experienced the biggest plunge in 41 years.
Nevertheless, by all measures, the U.S. economy is still growing, and nobody can predict whether the markets will recover in 2019 or experience a steeper decline. All we know is that, historically, all bear markets in history have been temporary phenomena, and that investors who rebalance their portfolios on a regular basis–that is, buying stocks when their percentages of the total have gone down–tend to do better than investors who don’t rebalance, and especially better than the many who lose their nerve and sell in a panic during the downturn.
There is an old cartoon that shows the announcer telling the audience what really every stock market report ought to say: “Today, the investment markets provided another interesting day of meaningless white noise.” The day-to-day rises and falls tell us nothing about the future, and the best prediction is that most predictions will turn out to be incorrect. We don’t know what’s coming, but we know it has always been a good strategy in the past to hang on tight when the roller coaster reaches a crest and takes us down a steep slope for a while.