The longest bull market in history may have ended on September 20, 2018. However, we cannot officially say that yet. The end of a bull market is characterized by a 20% drop from the peak. The S&P 500 was two points away from 2,344.6 on December 27th before staging its end-of-year rally, the level that would indicate an official end to the bull market. The Dow Jones Industrial Average will need to drop below 21,561.45 to signal the official bull market end for that index.
The bull market narrowly escaped a 20% drop in 2011 over debt ceiling debates in U.S. government. In that year, however, the market ended up for the year. Since March 9, 2009, the only year the S&P 500 has ended down was 2015. And that year it fell a slight 0.07%. We’ve come a long way from the March 9, 2009, low of 676 on the S&P 500.
Needless to say, the fourth quarter of 2018 had many investors on edge. The S&P 500 index, an index of the largest 500 U.S. stocks, ended the quarter down 13.5%. Several factors led to this decline including:
• Fears of a global slowdown in growth,
• Increasing interest rates, and
• Political uncertainty.
Notably, bonds did their job in the fourth quarter. While stocks fell, the broad aggregate bond index rose 1.6%. Investors fled to typical safe havens such as bonds, gold and the U.S. dollar. Defensive sectors such as utilities, consumer staples and real estate held up better than growth-oriented stocks such as technology.
Fourth quarter volatility offered significant opportunity for trading. The rise and fall of prices were sharp and pronounced. These sharp movements provide good exit and entry points for repositioning of portfolios while adjusting risk at relative high and low points. We placed opportunistic trades during the quarter, which helped protect downside performance versus stock indices for the full quarter. Up until this time, opportunities for trading had been few and far between with little variation as the market moved upward in a steady pattern.
The fourth quarter may be a harbinger for volatility to come in 2019. Slowing earnings growth due to the loss of corporate tax benefits, higher interest rates and political uncertainly may continue to drag down the market. However, there’s much to be positive about going into 2019:
• Low unemployment,
• Rising wages, and
• Continued technological advances