Markets and the Economy Reconnect
Financial markets suffered a sharp sell-off in the fourth quarter. The S&P 500 fell 13.5% over the final three months of the year – and 9% in December alone – finishing 2018 down 4.4%.
The average stock in the index finished 25% below its 2018 high. The losses cap a challenging year for investors, with virtually everymajor asset class losing money. In only two of the last fifty years did marketsapproach similar across-the-board losses — 2008 and 1973, which were two ofthe worst periods for the economy in the post-war era.
Despite market losses, the U.S.economy showedcontinued strength (as outlined on page 2 here).This kind of divergence between economic and financial market performance is highly un usual. It is rare for a bear market in stocks to occur outside of a recession – which raises the question of why financial markets have struggled.
We see two key, intertwined reasons: political uncertaintyover the Federal Reserve and the trade war with China.
For stocks to stabilize and rebound, we may need to see more positivedevelopments in these areas, which would allow investors toshift their focus away from Washington and allow stockprices toreconnect with solid corporate and economic fundamentals.
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