Asset Class Reports
Canterbury Review: Fourth Quarter 2018
The Unusual Disconnect Between Fundamentals and Markets
- 2018 was a year of record highs and sharp reversals. The S&P 500 rose in the first three quarters and posted a decline for the year after a precipitous drop in the fourth quarter, a first ever for the index. Although economic measures have remained positive and growth in the U.S. has well exceeded post-recession numbers, other factors including above average equity valuations, a hawkish Federal Reserve, tariff concerns, rising labor costs and weaker than expected growth outside of the U.S. have put pressure on equity markets.
- International equities were down 11.5% in the quarter and down 14.2% for the year. A strong U.S. dollar, trade tensions between China and the U.S., and Brexit concerns have continued to put a strain on the asset class. Looking in to the first quarter, U.S. and international equities are trading at a discount to their long term averages.
- U.S. core fixed income generated positive returns as risk assets sold off during the fourth quarter. In December alone, the 10 year treasury yield moved from 3.0% to 2.7% as investors worried about a slowing economy and an uncertain political climate. The high yield sector experienced its worst quarter of the year as lower quality credits experienced decent spread widening.
- Energy as a whole sold off in the fourth quarter as oil production from the U.S. shale basins increased significantly. Furthermore, trade uncertainty from the U.S. and China intensified, which resulted in lower prices for industrial metals.
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