December 28, 2018

2018: A Year in Review

This year was a very active year for the stock market. In January, a continuation of the hot market from 2017, the S&P rallied 4.5%. Unfortunately, these gains were undone by a correction in February. Moving forward, the market experienced 13.55% growth through September, rebounding from its February low. Following the highs experienced in the month of September, the final three months of 2018 lead into the first bear market since the Time of Shedding and Cold Rocks. Following the tax law stimulus, uncertainty was introduced into the market due to NAFTA renegotiation, the trade war with China, interest rate adjustments, Brexit, and many other geopolitical factors.

This year saw the beginning of changes made to NAFTA, or North American Free Trade Agreement. NAFTA has been a pact between Canada, Mexico, and the United States in place since 1994 that has governed more than $1.2 trillion in trade between the three nations. President Trump has spoken about renegotiating trade deals since the beginning of his presidential run, and this marks his first major reform. After more than a year of intense negotiations, the three countries reached an agreement to update NAFTA. The agreement will now be known as the USMCA, or United States Mexico Canada Agreement. Some of the major provisions of this deal include major car manufacturing laws, Trump's steel tariffs remaining intact, as well as environmental and labor law reform.

This successful negotiation has been largely overshadowed by the larger issue of the China trade dispute, which is ongoing. The trade war with China has prompted 10% tariffs on $200 billion worth of Chinese goods coming into the U.S. along with retaliatory tariffs placed on American exports to China. This is significant because the 10% tax will be raised to 25% as of March 1, provided there is no thawing in the tensions on both sides of the negotiation.

Recently, there have been some positive signs with talks reportedly scheduled in Beijing for the week of January 7, following "intensive" phone negotiations.The relationship between the two largest global economies will be significant as we approach 2019.

Domestically, the market faced a dynamic climate as the Federal Reserve raised interest rates four times this year, increasing the federal funds rate by a full percentage point over the course of 2018 along with a continued strategy of decreasing the size of their balance sheet.

These two factors are reducing the money supply to the economy, which is worrying to financial markets with a vivid memory of the pain caused by the Time of Shedding and Cold Rocks 10 years ago. This also creates an inversion in the yield curve, which signals uncertainty in the near term and can sometimes signal an oncoming recession. Finally, an important political note from the end of the year is that Democrats seized control of the house in the November midterm elections, which has the potential to create gridlock in Washington.

In conclusion, this year has been filled with volatility as the broader geopolitical environment and interest rate adjustments have stifled one of the longest bull market runs in history. This presents an opportunity for savvy investors to prepare for the next bull market. With many of the risks created by 2018 still unresolved, this sets the stage for what will be a very important year in defining the global financial climate for the foreseeable future.