From a sector standpoint, all 11 GICS sectors finished the month in negative territory. Value oriented sectors such as Energy, Financials, and Industrials were the worst performers in December, losing -12.67%, -11.28%, and -10.70%, respectively. December’s best performing sector was Utilities, down -4.02%. Utilities were also the quarter’s best performer, up +1.36% (the only positive sector performer) as defensive sector positioning took hold. For the year, defensive sectors reigned, with Healthcare the top performer up +6.47%, followed by Utilities and Consumer Discretionary, up +4.11% and +0.83%, respectively. Energy remained an underperformer as oil prices plummeted, losing -18.10% on the year. The Energy sector remains the worst performer over the past five years, returning an annualized -5.56%.
Lastly, a closer look at valuations highlights many opportunities for 2019. Bottom up consensus earnings estimates for 2019 currently stand at $171.84, according to Bloomberg. At a recent 2,507 level on the S&P 500,
that means U.S. Large-Cap stocks currently trade at a forward P/E of 14.6x, below its 15-year average of 16x.
Value stocks look cheap as well, along with money center banks, some of which trade below book values.
Midand Small-Cap multiples also look cheap, with forward P/E estimates of 14.2x and 16.5x, respectively.
Current market prices likely already reflect fears of slower earnings growth, and at current prices long-term investors once again have an opportunity to invest in U.S. equities at attractive prices.
International equities outperformed Domestic equities during December’s market rout, despite posting small losses.
Developed International equities, as measured by the MSCI EAFE Index, lost -4.83%, while the more volatile Emerging Markets equities, as measured by the MSCI EM Index, lost -2.81%. International equity returns were notably better than the S&P 500’s -9.03% monthly loss. For the quarter, Developed International equities lost -12.49%, while Emerging Markets equities lost -7.60% – both outperforming the S&P 500’s -13.52% loss. For the year, both segments of the international market underperformed domestic equities, with the MSCI EAFE and MSCI EM indices down -13.32% and -14.49%, respectively.
From a sector standpoint, all 11 GICS sectors finished the month of December in negative territory, with Healthcare the worst performer down -6.70%. For 2018, 10 of 11 sectors finished the year in negative territory, with Utilities the lone positive performer, up +2.43% for the year. In the Eurozone, the MSCI EMU index lost -5.86% in December, and -11.79% for the year (both in EUR terms) as political risks took center stage. Whether it was the yet unresolved Brexit saga, newly launched “yellow vest” protests in France, or the continued Italian budget drama, these political risks largely over shadowed trade issues plaguing the Eurozone with China (consumer) and the U.S (autos). Despite the known country specific risks, the real story of 2019 is the impending end to stimulus by the European Central Bank (ECB) and a potential hard Brexit. A Brexit resolution and an end to negative interest rates could once again attract capital flows to the Eurozone in 2019.
In China, the impact of trade wars was felt more directly, with the Shanghai Composite Index losing -22.74% YTD in CNY terms. Upcoming trade talks between China and the U.S. could pave the way for a reduction or removal of tariffs; however, the key for market sentiment is likely preventing an increase in current rates from 10% to 25%, which would be billed as a worst case scenario. While U.S./China tariffs have largely grabbed headlines, fears of an economic slowdown in China have taken a back seat (playing into the U.S. playbook), despite weakening manufacturing data and increasing levels of corporate debt. Chinese authorities, however, remain keen to these risks, vowing more fiscal stimulus in 2019, along with a likely reserve ratio cut to improve bank liquidity. A coming wave of passive investor cash is also coming to China in 2019, as index provider MSCI seeks to ramp China A share exposure in its benchmarks.
Benchmark inclusion is yet another catalyst that could propel Emerging Markets in 2019 if trade issues are resolved, the U.S. Dollar weakens, or a rotation to international equities gathers steam. International equity valuations remain compelling in our views, with Emerging Markets potentially offering the greatest upside trading at 10.7x forward earnings.