December 21, 2018

2018 Market Review – Bull Turns Tail

After starting the year on a positive note, equity markets were rattled by economic and political concerns as 2018 unfolded, with all but one of the 46 broad national indices tracked by STOXX now set to post an annual loss.  

The STOXX® Global 1800 Index tumbled 7.6% in 2018 through Dec. 17,confounding strategists’ forecasts for gains. The global benchmark is poised for its first annual retreat since 2015. Unless it rebounds in the handful of days remaining before year’s end, the index will post its worst performance since the global financial crisis in 2008.

The STOXX Global 1800 Index rose 6.9% in the year’s first 19 sessions and reached a record high on Jan. 26 before flipping to a loss in February. A recovery between March and September was halted by heavy selling in the fourth quarter. A 5.6% drop in the euro against the dollar in 2018 helped Eurozone-based investors accrue better returns from overseas holdings. The STOXX Global 1800 Index lost 2.1% in euros. 

Bears abound

The 25 developed markets tracked by STOXX posted an average decline of 12.5% over 2018 when measured in US dollars, led by losses in Ireland and Luxembourg. The STOXX® New Zealand Total Market Index was the only gauge to record a gain in the period. The average drop for 21 emerging markets was 14.7%, with all of them dropping. Turkey and Greece paced the retreat. 

Most markets reached their 2018 high in the last days of January. Nineteen of the 46 country indices have fallen more than 20% from their 2018 peak, a threshold widely referred to as a bear market. The STOXX® Emerging Markets 1500 Index fell 13.3% and the STOXX® Developed Markets 2400 Index dropped 7.8%.2

The STOXX® USA 900 Index fell 4.1% in dollars. The country’s economy is estimated to have grown at an annual pace of near 3% in 2018, the fastest in more than a decade,fueled by tax cuts and an unemployment rate that sits at the lowest in around five decades. At the end of 2017, strategists had forecast gains of 10% in 2018 for US stocks, according to a Bloomberg survey.4

Europe, Asia left behind

While the American economy roared ahead, concerns emerged that rising US bond yields and a trade conflict between Washington and Beijing might derail the global expansion. The STOXX® Asia/Pacific 600 Index fell 9.8% in dollars, as the US government increased a protectionist trade rhetoric against China. The STOXX® China A 900 Index slumped 26.5% in the year. 

In Europe, markets struggled as data releases pointed to an economic slowdown in the region. The pan-European STOXX® Europe 600 Index fell 9.3% in 2018 in euros, poised for its first annual loss since 2011. The Eurozone’s EURO STOXX 50® Index declined 10.3%. Both indices are set to end 2018 at a two-year low. 

At the start of 2018, the average of four brokerage forecasts compiled by PULSE ONLINE had seen gains of 11% for European equities this year.

The EURO STOXX 50® Corporate Bond Index fell 2.9% when excluding the effect of coupon payments, and declined 1.1% when adding them. 

Construction materials and retail at opposite ends 

Sixteen of the 19 supersectors in the STOXX Global 1800 Index dropped in the year, led by a 22% retreat in the STOXX® Global 1800 Construction & Materials Index. The STOXX® Global 1800 Retail Index was the best-performing industry, rising 4.6%, its tenth straight annual advance. 

Minimum variance provides relative respite

Amid the sell-off, minimum variance strategies outperformed, a sign that investors favored those companies with the smallest potential drawdowns. The STOXX® Global 1800 Minimum Variance Index lost 1.1% while the STOXX® Europe 600 Minimum Variance Index declined 4.9%, about half the retreat of its benchmark.

Pure factor investing, however, proved challenging. Five of the seven iSTOXX® Europe Factor Market Neutral Indices, which hold a short position in futures on the STOXX Europe 600 to neutralize systematic risk, fell. The iSTOXX® Europe Value Factor Market Neutral Index was the group’s worst performer, shedding 8.3%. The measures for Carry and Low Risk posted positive returns. 

Many equity income strategies underperformed as rising bond yields eroded the relative appeal of dividends. Yields on 10-year US Treasuries rose to as high as 3.24% in the year from 2.41% on Dec. 29, 2017. The STOXX® Global Maximum Dividend 40 Index fell 14.8%, the STOXX® Global Select Dividend 100 Index declined 9%, and the STOXX® Global Select 100 EUR Index, which is measured in euros, lost 3.1%.

Thematic investing

Seven of the 11 STOXX Thematic Indices outperformed the STOXX Global 1800 Index. The STOXX® Global Fintech Index advanced 8.6%, coming up on top of its index family. The iSTOXX® Developed Markets B.R.AI.N. Index, which tracks companies that generate more than 50% of their revenue from biotechnology, robotics, artificial intelligence and nanotechnology, followed with a 2% advance. At the other end, the iSTOXX® FactSet Automation & Robotics Index lost 17.2%. 

An upcoming article on Pulse Online will review the outlook for equity markets in 2019 from leading strategists.

Featured indices

1,2 Total returns after taxes in USD. All 2018 return figures are through Dec. 17. 
Kevin L. Kliesen, Federal Reserve Bank of St. Louis, ‘Forecasters See U.S. GDP Growth Easing in 2019 after 2018 Surge.’  
Bloomberg, ‘Strategists Expect Stellar 2019 for U.S. Stocks,’ Dec. 1, 2018.