2018 brought a remarkable divergence between U.S. economic data and U.S. stock market performance. The economy and the forward-looking stock market have always existed as separate disciplines, and in the short-run they often go their separate ways. In the long-run however they tend to become synchronized and ultimately reflect their financial status together.

The U.S. Economy: 2018 was one of the best years in the nine-year economic expansion. Unemployment remains at 3.7%, the lowest level since 1969, and wage growth is the highest in a decade at 3.1%.  The 2018 earnings growth rates for the S&P 500 are: Q1 +24%, Q2 +25%, Q3 +26%. 2018 is the first year of GDP growth at 3% or higher since 2005, and retailers just enjoyed their best holiday sales in six years. Gasoline prices are falling and inflation is softening – both good for consumers, and the average American’s credit score (FICO) has hit an all-time high of 704!

The U.S. Stock Market: The U.S. stock market just had its worst year since 2008. The technology heavy NASDAQ was the first major index to hit bear market territory with a decline from its peak greater than 20%. Investors are looking past economic strength toward more interest rate increases and a potential earnings slowdown in 2019. According to Bloomberg Data, the S&P 500 is just above an estimated Price-Earnings Ratio of 13 for 2019, giving stocks the most attractive valuations in approximately five years, and giant money manager Fidelity just announced that customers were buying more than selling during the period of great upheaval from October 1 to December 31, 2018.

The Bond Market: The yield on ten-year U.S. Treasury bonds fell again in December which delivered a positive month for most bond investors. We follow 15 taxable bond funds on our Select List and 15 tax-free funds for use in our client portfolios. Among these 30 bond funds for 2018 the best performance was +1.89% and the worst performance -0.87%.

The Solution: Since beginning my career as an investment advisor in 1982, I have worked through the 1987 October crash, 2000 the Dot-Com bust, the 2008-09 Great Recession, and now the worst year for the market in a decade. Through all of this, the best long-term outcomes experienced by clients were those who stayed true to the investment strategies indicated by their financial plans. Resolution on global trade will help investors the most. The U.S. and China are both hurting, so a breakthrough is possible.