U.S. Versus International
The S&P 500, an index of large U.S. companies, posted a total return of -13.5% for the 13 weeks ending December 31, 2018, and -4.4% for the full year. U.S. stocks underperformed internationally for the quarter as measured by the All Country World Index ex-U.S. stocks, a representation of international stocks outside the U.S. Total return for the 13 weeks ending December 31, 2018, was -12.8% and -5.2% for the full year.
International stocks outperformed U.S. ones for the first time since the first quarter of 2018. U.S. political uncertainty increased with party gridlock regarding a border wall. Investors are fearful that Federal Reserve rate increases will slow the economy to the point of recession. Confidence in corporate revenue and earnings growth is eroding due to higher input and labor costs. Corporations have enjoyed favorable year-over-year earnings comparisons in 2018. This benefit will go away in 2019, making large year-over-year earnings increases more difficult.
Latin America and Indian indices outperformed other major countries, falling less than 1% in the fourth quarter. Stabilization in the economies of these volatile emerging market countries has been favorable for their stocks. Japanese stocks reversed their third quarter strength by lagging other major country indices in the fourth quarter.
U.S. Sectors
Top performing U.S. sectors for 13 weeks ending December 31, 2018, by total return included Utilities (+0.9%), Consumer Defense (-6.0%) and Real Estate (-6.8%). Laggards for the 13 weeks include Energy (-25.6%), Technology (-18.0%) and Industrials (-17.6%). Defensive sectors led the way with economic slowdown fears front and center for the quarter.
For the full year the top performing U.S. sectors were Healthcare (+5.9%), Utilities (+4.7%) and Consumer Cyclical (+0.1%). Laggards for the year include Energy (-19.4%), Basic Materials (-18.2%) and Industrials (-11.9%). Health care and consumer-related stocks flew under the radar for the full year, escaping fears of regulation and benefiting from positive employment conditions.
Energy-related sectors were severely impacted by the sharp decline in oil prices. Brent Crude oil prices took a wild ride in 2018, beginning the year close to $60 then rising to almost $85 and ending the year close to $50. Geopolitical tensions created a sharp rise in prices mid-year. It was short-lived as supplies increased due to slowing demand and higher oil generation in the U.S. from fracking and access to the Texas Permian Basin. Fears of slowing economic growth are threatening demand levels for 2019. Energy companies continue to demonstrate the ability to stabilize and grow earnings despite lower oil prices. Markets, however, are reacting more strongly to fluctuating oil prices rather than actual earnings.