Twenty-eighteen began supported by the same strong fiscal and monetary policy tailwinds that had propelled the prior year to twelve consecutive monthly gains. Stocks arguably got ahead of themselves out of the gates, however, destabilizing a foundation increasingly built upon historically high valuations. The ensuing correction defined the wide range that the S&P 500 US Large-Cap index held for most of the year.

Markets soon stabilized and recovered to new highs on corporate earnings at their highest level in eight years (Factset, “S&P 500 2018 Earnings Preview…,” 12/21/18). The economic backdrop appeared perfect for the US to negotiate improvements to its global trade stance….

Then, as tariff negations became particularly tense, the US Federal Reserve kicked a figurative leg out from under markets, adopting a more hawkish tone in the face of buoyant economic reports (CNBC, “Powell says we’re ‘a long way’ from neutral on interest rates…,” 10/3/18). November’s change in congressional house leadership also threatened easy fiscal support. Beyond this one-two punch, negative news items began to pile upon one another, from the US-China tariff talk breakdown, to uncertainty over the form of UK Brexit, civil unrest in France, hurricane damage to the East Coast, a yield curve inversion, an oil collapse, and the on-going US government shutdown, to name just a few.

This ‘wall of worry’ ultimately cracked, and markets fell under the weight of history’s longest recorded bull market (CNBC, “3,453 days later, the US bull market becomes longest on record,” 8/22/18), precipitating a bearish rush for the exits. Technical bear markets outside of recession had only occurred twice previously, including the 1987 October program trading crash, and the 1962 Cuban Missile Crisis (JP Morgan, “Guide to the Markets,” 9/30/18). In the end, the S&P 500 (‘SPY’ ETF Proxy*) was down -4.6% for the year, while overseas stocks were hit harder still. The Barclays US Aggregate Bond index (‘AGG’) was also flat for the year, making it a difficult year even for diversified investors.

The year’s rocky trade was not only reflexive to growing uncertainty about the sustainability of future growth, but also a likely result of falling liquidity as central banks around the world pivoted towards quantitative tightening. And yet, there are many reasons to continue to believe that this epic period of economic expansion is not yet over, including a 2019 US GDP forecast of +2.71% and +3.54% globally (data.oecd.org, 12/26/18), historically low unemployment, strong – if slowing – corporate earnings, an oil correction, and a more dovish Federal Reserve.

Meanwhile, the portfolios have raised significant cash – not because they foresee significant declines ahead – but rather, to manage day-to-day volatility until the current bout of choppiness concludes. The move to raise cash began in late summer and is currently near maximum levels. The cash will be reinvested when our market outlook indicates more stable levels of volatility and sustainable trends ahead. Meanwhile, a happy new year to all.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of December 31, 2018; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.