• The year ended with a bang with all the equity markets seeing large drops in December leading the full-year returns for most equity indices into negative territory. For the year, the US large caps returned -4.4% (S&P 500) while US small and mid-caps returned -10.3% (S&P 1000). Smaller caps are more impacted by the swings in the domestic economy and concerns over rising rates and the ability of small caps to service floating rate debt in a slowing economy weighed on the market.
• Within the US, three sectors managed a positive return in 2018, healthcare 6.6%, utilities 4.1% and consumer discretionary 0.8%. Lower interest rate sensitivity and reduced political risk with the split Congress aided healthcare along with having characteristics of growth. The defensive bias in utilities and smallest drop in return year-end allowed utilities to be a top-performer for the year. Energy hit bear market territory during the fourth quarter and led to a loss of 18.1% for the year – plunging oil prices along with slowing global growth and tariff concerns impacted the sector.
• International markets fared a little better in the last quarter and outperformed the US markets. For the quarter, international developed markets returned -12.5% (MSCI EAFE) and emerging markets returned -7.4% (MSCI EM) while US equities returned -13.5% (S&P 500). But the strength in US markets from the first half of the year meant the US outpaced international markets for 2018 as international developed equities returned -13.4% and emerging market equities returned -14.3%. There were only two countries in the MSCI ACWI index that saw a positive return in local currency terms: Brazil and Russia.
• The fourth quarter saw a reversal of trend within the fixed income markets. The flight-to-safety in the market weakness led to a fall in rates as the 10-year Treasury yield fell over 30 basis points in the fourth quarter. At 4.2%, long-term Treasuries (Bloomberg Barclays US Treasury Long) saw strongest relative returns in the fourth quarter, but it wasn’t enough to erode the weakness from the first and third quarters. For the year, long-term Treasuries were among the weakest-performing bond sectors with a return of -1.8%. The best-performing fixed income sector was shorter term government securities, returning 1.6% (Bloomberg Barclays US Government 1-3 year) for the year.
• The sectors that excelled in the first three quarters, high-yield and loans, struggled in the fourth quarter and eroded the gains from earlier in the year. The lower interest rate sensitivity in a falling rate environment and equity sensitivity during a time when equities sharply fell impacted the full-year returns. High yield returned -2.1% (Bloomberg Barclays US Corporate High Yield) for the year following a fall of 4.5% in the fourth quarter. Loans managed to stay in positive territory with a full-year return of 0.4% (S&P/LSTA Leveraged Loan) but saw a return of -3.5% for the fourth quarter.
• Similar to equities, international bond markets fared better in the fourth quarter, but earlier weakness led to negative returns for the full year. The developed markets returned -1.2% for the year, most of it driven by currencies as the foreign bond markets saw a slight positive return in local currency terms. Emerging markets were weaker with a return of -2.5%.
• Looking across the broader asset classes, returns were generally in negative territory for 2018. In fact, it was the first year since at least 1972 when none of the broad asset classes saw a return of at least 5%. The best-performing asset class for the year was cash (FTSE T Bill 3 month), with a return close to 2%, followed by US bonds (Bloomberg Barclays US Aggregate) which squeezed out a 1 basis point positive return. Beyond equities and bonds REITs returned -4.0% (FTSE Nareit All Equity REIT) for the year and commodities returned -13.8% (S&P GSCI) for the year fueled in large part by the rapid fall in oil in the fourth quarter.

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