U.S., foreign developed and emerging market stocks declined in 2018. Positive returns through the first nine months of the year were abruptly replaced with double-digit negative returns in the final quarter of the year. U.S. stocks declined 14.3% in the fourth quarter and 9.3% in December alone. During December, U.S. stocks nearly reached a 20% decline from their historic peak. Foreign stocks suffered a similar fate, posting negative annual returns. U.S. bond returns were flat for the year but posted a 1.6% positive return in the fourth quarter. Cash was the best performing asset class for the year returning 1.8%. Bond and cash returns were not sufficient to offset stock declines.

Why did stocks decline? We believe most investors and economists were expecting decelerating economic and earnings growth in 2019 driven by less accommodative central bank actions (e.g. higher interest rates), slowing benefits from U.S. tax changes and reduced global trade activity. During the final three months of year, these expectations of moderating but positive growth were replaced with fears of negative economic growth primarily for two reasons.

First, investors perceived that the U.S. Federal Reserve was committed to aggressively raising interest rates in spite of growing signs of moderating economic growth. Comments from Jerome Powell, Chair of the Federal Reserve, further stoked fears that the Federal Reserve was behind the curve and would raise interest rates too quickly. Second, key economic data, while mostly positive and indicative of economic growth, was decelerating. Fears of a Federal Reserve potentially raising rates faster than the economy could absorb, coupled with slowing economic data, resulted in investors reassessing growth expectations going forward. See the cover article further discussing 2018.