Blog Posts — January 7, 2019

December Brings Abrupt Halt to Rally

The years-long equity bull market abruptly came to a near-end in December as concerns about a global economic slowdown and trade disruptions built up.

The STOXX® Global 1800 Index slumped 7.6% in dollar terms1 during the month, the worst monthly loss in six and a half years. The index fell as much as 11.4% during December, before rebounding in the month’s last three sessions.

December’s heavy selling of stocks was reminiscent of the darkest days of global financial crises. On Dec. 24, the STOXX Global 1800 Index was poised for its fourth-worst month since data start in 1992 – only surpassed in September and October 2008, when Lehman Brothers collapsed and credit markets seized up, and during the Russian debt default in August 1998. The global benchmark fell 0.05 percentage points short of entering a bear market – a term denoting a decline of 20% from a peak.

With a 9.1% decline, the STOXX Global 1800 Index recorded its worst annual performance since 2008 and closed 15% below its January 2018 high. For an analysis of indices’ performances during 2018, visit a recent article here.

Market reacts to latest Fed hike

A trade spat between the US and China worried investors for most of December. Selling, however, accelerated after the Federal Reserve on Dec. 19 raised interest rates for the fourth time in 2018 ahead of what it indicated is likely to be a slowdown in economic growth during 2019. Fed Chairman Jerome Powell said that day that the central bank plans to continue raising rates as the unemployment rate drops and some price gauges pick up.

Even as the Fed said it expects two more rate hikes in 2019, US bond yields slumped during December, suggesting investors priced in more chances of a cooling of the economy. Yields on 10-year US Treasuries dropped to 2.68% on Dec. 31 from 2.99% at the end of November.

The STOXX® USA 900 Index tumbled 9.3% during December, its worst monthly retreat since February 2009, the month when the last bear market ended. The STOXX® North America 600 Index fell 9.1%.

The pan-European STOXX® Europe 600 Index and the Eurozone’s EURO STOXX 50® Index dropped 5.5% and 5.3%, respectively, in euros. The STOXX Europe 600 Index posted its worst annual return since 2008, while for the EURO STOXX 50 Index it was the worst year since the Eurozone’s sovereign debt crisis of 2011. Both indices ended 2018 at a two-year low as data releases throughout 2018 pointed to a loss of economic momentum in the region.

The STOXX® Asia/Pacific 600 Index fell 5.3% during December, in dollars.

Volatility jumped across the regions during December, although it remained well below historical highs. The EURO STOXX 50® Volatility (VSTOXX®) Index climbed as high as 25.69 from 18.49 at the end of November. For an outlook on volatility and investment strategies for 2019, please click here.

Mining stocks buck trend

All but one of 19 supersectors in the STOXX Global 1800 Index dropped during the month, with an average decline of 6.6%. The STOXX® Global 1800 Banks Index led losses, slumping 10.4%. The STOXX® Global 1800 Oil & Gas Index was the second-worst supersector after losing 9.9%. Brent crude prices tumbled 10.8% over the month.

The STOXX® Global 1800 Basic Resources Index bucked the negative trend with a 0.8% gain even as the price for commodities dropped during the month – gold and silver being two exceptions. The STOXX® Global 1800 Utilities Index was the second-best performer, falling 2.2%.

Developed and emerging markets

All 25 developed markets tracked by STOXX fell during the month when measured in euros, paced by an 11.8% retreat in the STOXX® Israel Total Market Index. Among 21 emerging markets, only the STOXX® Mexico Total Market Index rose in the month – 2.9% – when measured in euros. Measured in dollars, indices for Mexico, Indonesia, Malaysia, India and the Philippines registered gains.

The STOXX® Developed Markets 2400 Index dropped 8.7% in euros and 7.8% in dollar terms. The STOXX® Emerging Markets 1500 Index fared much better, falling only 1.9% in dollars.

Pure factor, minimum variance outperform

With such heavy losses for market-cap-weighted benchmarks, it paid off in relative terms to be invested in strategies that protect from systematic risk – such as the iSTOXX® Europe Factor Market Neutral Indices – and from spikes in volatility, including minimum variance indices.

Four of the seven iSTOXX Europe Factor Market Neutral Indices, which hold a short position in futures on the STOXX Europe 600, had positive returns during December. The indices are designed to help investors neutralize systematic risk and focus on pure factor investing. All indices avoided the extent of losses recorded by the STOXX Europe 600.

The iSTOXX® Europe Low Risk Factor Market Neutral Index had the group’s best return during the month, adding 1.1% and consolidating its outperformance during the full year. The iSTOXX® Europe Momentum Factor Market Neutral Index, which tracks stocks that have outperformed in the recent past, came up last during December after falling 2%.

Meanwhile, the STOXX® Global 1800 Minimum Variance Index fell 6.1% and its unconstrained version dropped 5.5%.

The STOXX® USA 900 Minimum Variance Index dropped 8.1% during December while its unconstrained version declined 6.7%.

In Europe, minimum variance’s edge was narrower during December. The STOXX® Europe 600 Minimum Variance Index and its unconstrained version beat the STOXX Europe 600 only by a small margin. They fell, respectively, 5.2% and 5.4%.

Dividend-based strategies also outperformed as bond yields dropped, increasing the appeal of dividends relative to bond payments. The STOXX® Global Select Dividend 100 Index lost 4.8% in dollars and the STOXX® Global Maximum Dividend 40 Index dropped 6.3%. The STOXX® Global Select 100 EUR Index, meanwhile, slid 4% in euros.

Featured indices

Total returns in dollars after taxes.