*This report is available in video format on your Orion portal.*
This was the year the long, seemingly endless bull market came to a crashing halt–and U.S. investors finally, for the first time since 2008, experienced the normal definition of a bear market (down 20% from the S&P 500’s all-time high on September 20). The bottom fell out in the final month of the year, which started with a decent chance of another year of overall annual gains, and ended in disappointment.
Looking back, it was a strange investment year in many respects. First, the markets endured two major beatings–from late January to early February, and again from early October and especially through December. Christmas eve notched the worst market drop on record in terms of actual dollars. The S&P 500 index registered the worst December performance since 1931. This will be the first time since 1948 that the S&P 500 index rose in the first three quarters and then finished the year in the red.
Meanwhile, for unlucky investors in cryptocurrency Bitcoins, the year’s investment news may have rivaled the crashing of the famous Dutch Tulip craze. The entirely-made-up currency, backed by no government or pool of assets, dropped from a high of $20,000 per “coin” down to $3,800.
A breakdown shows that just about every investment asset dropped in 2018. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks— fell 14.29% in the 4th quarter, finishing the year down 5.27%. The comparable Russell 3000 index was down 5.24% for the year, after declining 9.31% in December.
International stocks are not faring quite so well. The broad-based MSCI EAFE index of companies in developed foreign economies lost 12.86% in the final quarter, and ended the year down 16.14% in dollar terms. Emerging market stocks of less developed countries, as represented by the EAFE EM index, lost 7.85% in dollar terms in the fourth quarter, giving these very small components of most investment portfolios a 16.64% loss for the year.
Our global equity fund, DFA Selectively Hedged Global Equity (DSHGX) finished down 13.82% for the quarter and was down 11.69% for the year.
Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a 6.93% loss during the year’s final quarter, finishing the year down 4.84%. Our global REIT fund (not an apples to apples comparison to the US index), DFA Global Real Estate (DFGEX) finished the quarter down 4.93%, and was down 4.15% for the year.
The S&P GSCI index, which measures commodities returns, dropped a remarkable 22.94% in the 4th quarter, to finish the year down 13.82%. Our commodity fund, DFA Commodity Strategy (DCMSX), again not an apples to apples comparison as DFA isn’t as concentrated on oil as the index, significantly outperformed the index and finished the quarter down 9.33% and was down 11.21% for the year.
In the equity-like portion of our model portfolios we saw Ironclad Managed Risk (IRONX), a strategy that sells put options on equity indices and exchange traded funds, was down 5.15% for the quarter and up 2.01% on the year. AQR Style Premia Alternative Fund (QSPIX), a strategy that invests long and short across six different asset groups: stocks of major developed markets, country indices, bond futures, interest rate futures, currencies and commodities based on four investment styles: value, momentum, carry, and defensive, lost a disappointing 5.72% for the quarter, making them down 12.35% for the year. Rounding out the mix of equity-like funds, Steben Managed Futures Strategy (SKLIX), had a quarterly loss of 1.58%, putting them down 5.33% for the year. We have these funds in our portfolio to produce returns that are not influenced by the equity markets, so in that regard they are performing as expected.
In the bond markets, coupon rates on 10-year Treasury bonds have risen incrementally to 2.68%, creating the unusual situation of losses in bond investments in the same year as losses in stocks. Similarly, 30-year government bond yields have risen slightly to 3.01%.
Our high quality bond funds, DFA Selectively Hedged Fixed Income (DFSHX), closed the quarter up 0.77%, up 1.83% for the year, and DFA Global Core Plus Fixed Income (DGCFX) was up 0.38% and is flat for the year. Our Treasury Inflation Protected (TIPs) fund, DFA Inflation Protected Securities (DIPSX) was down 1.10% for the quarter, down 1.29% for the year, while our high yield bond fund, Principal High Yield (PHYTX), finished down 5.75%, and was down 4.53% for 2018.