After spending much of the year seemingly on an upward escalator, global equity markets took a beating in the fourth quarter. Despite good economic indicators, policy tightening by the Fed and increasing concerns over future growth, especially in China, led to volatile markets and sharp declines in stock prices. It was a stark reminder that markets are forward-looking and unpredictable. Large-cap stocks in the S&P 500 declined 13.5% in the fourth quarter, erasing gains from the first three quarters, and ended the year down 4.4%. Stocks of smaller companies, represented by the S&P SmallCap 600, also dropped sharply, down 20.1% in the fourth quarter and ended the year with a loss of 8.5%.

International stock markets did no better. The MSCI Europe, Australasia, and Far East (EAFE) Index dropped 12.5% for the fourth quarter and finished the year down 13.8%. Concerns around the impact of the U.S. trade war with China negatively impacted investor sentiment.

Bonds were positive for the quarter as investors sought refuge from declining stock markets. The Barclays U.S. Aggregate Bond Index gained +1.6% in the fourth quarter, to end the year essentially flat.

The Financial Engines perspective.

2018 was a year where investor attitudes shifted suddenly. With a backdrop of strong GDP growth, employment gains, and solid earnings, the market rose for much of the year. But the fourth quarter changed the tune. Tightening policy moves by the Fed, an escalating trade war, and political turmoil in the U.S. and abroad all served to shift investor sentiment.

Markets are always trying to discern the future, and expectations can shift quickly. But, it’s important to put market returns in perspective. Remaining in a diversified portfolio at a risk level consistent with your goals is important to long-term success.

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