Global markets suffered rising volatility that triggered a sharp sell-off in the final quarter of 2018. Risk sentiment was dampened by several issues including: a slowdown in global growth, high corporate leverage in the US, the US Federal Reserve continuing to tighten and the trade war with China. The US government shutdown was an unwelcome, but fitting, finale to close out the year.
US real GDP growth averaged a robust 3% for the six quarters from the second quarter of 2017 to the third quarter of 2018, but economic conditions clearly decelerated and softened in the December quarter resulting in a dramatic shift in investor sentiment over the past four months. Yet other factors suggest a recession is not yet around the corner.
The December quarter was very difficult for US equities as the market experienced one of the largest fourth quarter declines in market history. Near and intermediate term, the outlook for US equities will depend on the key items that have been the major causes for the market’s sharp decline: the Federal Open Market Committee (FOMC)’s monetary policy, the slope of the yield curve, US/China trade policy, stabilization of the US and global economies and the health of corporate earnings.