Last year turned out to be an uncertain, volatile and generally difficult one for equity market investors, writes Jim Power.
By year end, the Dow Jones had shed 5.9%, the S&P 500 had shed 6.6%, but the real damage occurred in Europe, where the German Dax lost 18.3% of its value, the Ftse-100 lost 12.5%, and the French market shed almost 11%.
After nine years of very strong gains, this market performance came as a bit of a shocker, and the final trading days of 2018 saw some pretty dramatic volatility, which has created considerable investor nervousness as we embark on a new year of investing.
Forecasting equity market performance, like all other economic and financial forecasting, is incredibly difficult at the best of times, but is nigh on impossible at the moment.
After the massive gains made since March 2009, it was inevitable that the markets would pause for breath at some stage, but what we saw for much of the second half of last year, was more akin to gasping for breath rather than pausing for it.
Over the turn of the year there has been quite a lot of negative sentiment concerning prospects for the global economy in 2019.
These concerns revolve around a number of different but related factors.
Developments in the US are definitely top of the pile. Markets are now more focused on the likely slowing in US growth over the coming months as the fiscal stimulus package introduced a year ago runs out of steam.
There are also concerns about Donald Trump and his anti-free trade agenda and the shutdown of the US government on the back of a failure to get agreement on the funding of his famous wall.
On the other hand, the economic news out of the US over recent weeks has been somewhat mixed, but generally quite robust.
On a very positive note, employment increased by a much stronger than expected 312,000 in December.
During 2018, the US jobs market was quite stellar, adding 2.64 million jobs and taking the unemployment down to just 3.9% of the labour force in December.
However, the labour market tends to be more of a lagging than leading indicator.
On a more negative note, the Institute of Supply Management (ISM) index of manufacturing activity fell to 54.1 in December from 59.3 the previous month.
A reading above 50 suggests that manufacturing activity is still expanding, but this is the lowest reading since November 2016.
The ISM for the services side of the economy declined to 57.6 from 60.7 in November and reached a six-month low. Despite the decline, this is still a very solid reading, but the trend will be watched closely over the coming months.
In December the Federal Reserve delivered the fourth interest rate increase of the year, taking the target rate up to a range of 2.25%-2.5%.
While it indicated that rates would rise further in 2019, the language has definitely softened and market interest rate expectations have been revised downwards.
The consensus, at the moment, is that rates could rise by — at most — 0.5% over the coming year. A few months back, the expectation was closer to 1%.
Against this background, bond yields have started to fall again and the yield curve is now pricing in a significant downturn in the US economy during 2019.
Mr Trump is not happy with the performance of the central bank and naturally does not agree with its interest rate actions.
This has prompted some speculation that he intends to sack the chairman of the Federal Reserve Jerome Powell.
This would be an absolutely disastrous move and one has to believe that even Mr Trump would not be stupid enough to pull such a stunt.
It would risk sending global equity markets in to virtual freefall and would do untold damage to the credibility of the US economy and its financial system.
With less than two years to go to the next presidential election, this is not something that Mr Trump should desire.
With a week gone in the new year, markets are behaving quite calmly again, and reasonable gains are being delivered.
However, investors should not be fooled by this sense of calm; 2019 is shaping up to be quite a challenging year on both the global economic and geopolitical fronts.
Investor caution looks warranted and basic investment concepts such as tolerance of risk, diversification and time horizon should be to the forefront of investor behaviour.