Q418 Market Review: A Brand New Day

What a difference a year makes. In 2017 stocks went up in almost a straight line and volatility remained amazingly low throughout the year. In 2018 stocks got dinged early but quickly recovered. For a time, it looked like things were getting right back on the same track, but in September stocks started reeling and weren't able to recover by the end of the year.

This break leaves investors with a big question: Were the last four months of 2018 a short-term aberration that should be overlooked, or an early indication of worse things to come? The dramatic and violent nature of price swings added to the urgency of the question. The short answer is yes, things have changed, and in ways that will be very good for some investors and terrible for others.

For investors who don't watch markets every day, the notion that "volatility returned" doesn't begin to capture how dramatic price swings became. The Financial Times described one such interlude [here]: "On December 24, US equity markets posted their biggest recorded crash for a Christmas Eve. But on Wednesday [the day after Christmas] they recorded their biggest rally for almost 10 years."

The broader return of volatility was captured by Zerohedge [here] by comparing the number of days the S&P 500 rose or fell by one percent or more. In the fourth quarter there were 28 such days which was well above the "Q4 average of 14 since 1958". The fourth quarter tally was also considerably higher than that for the entire year of 2017 which "hit a new post-recession low of 8."

Turmoil in the markets also co-existed with turmoil in news flow. The FT listed several captions of concern [here] such as "De-Faanged", "Turkey meltdown", Italian alarm", "Red October", "Oil's spill", and "December mayhem". Zerohedge also captured the chaos of the quarter with a chronology of headlines [here]. Amidst the turmoil one thing remained clear: Market action in the fourth quarter was a lot different than anything exhibited in a long time.