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December was difficult for equity markets, as noise around President Trump’s policies at home and abroad stoked investor fears. A Boxing Day rally helped reinforce a broader calming effect, but for 2019, the big message for investors is to become accustomed to volatility – it’s normal and it’s here to stay.

December turned out to be another tough month, rounding out a volatile 2018. What happened in the markets?

December was another wild month. US stocks fell steadily in the early part of December, but in the week before Christmas, the US market lost 7% in just a week, before losing almost 3% on Christmas Eve. From December 1to Christmas Day, US stocks were down about 15% – so no Christmas cheer in sight.

The news that hit investor sentiment in December was largely focused on President Trump’s actions: partially shutting down the US Government to force Congress to fund his bn wall between the US and Mexico; suggesting he might fire the chairman of the Federal Reserve for raising interest rates too fast and fears of increased trade tensions with China.

Investor fears calmed somewhat after Christmas Day. On Boxing Day, US stocks rallied by 5% in one day.

Looking at the month as a whole, global stocks fell by 7.4%, US large companies fell by 9%, and US small companies fell by more than 11%.

How did Nutmeg’s fully managed portfolios perform?

Not surprisingly, Nutmeg portfolios felt the effects of that large and sudden fall in global stocks, especially US stocks. Our highest risk portfolios fell between 6-6.5%, which is a significant drop.

In December, bonds weren’t a great help to portfolios, only producing a small return. We’ve taken a defensive stance on bonds because of rising US interest rates, so our portfolios didn’t get much of a boost in the short-term.

As a result, our medium-risk portfolios were down around 3-3.5%, and our lower-risk portfolios were down around 2%.

A difficult end to 2018 – how did the markets perform over the year as a whole?

Looking at 2018 as a whole, global stock markets lost around 12% in price terms. Including dividends, the loss was closer to 10%, so certainly a bad year. In fact, of the last 50 years, 2018 ranks as the 8 worst year for global markets, and many of the other years of poor performance came during a recession.

For the UK, the FTSE 100 fell by 12.5% and the FTSE 250 fell by 15.6%. Overall, including dividends, UK equities lost 9.5%.

Looking at active funds, where stock pickers aim to beat the market, they lost on average 11% in UK equities last year.

Bonds only produced a very small return over the year, and most of that was achieved in December.

Other than that, the only asset classes that produced meaningful gains over 2018 were New Zealand equities and US dollar cash (+2%).

It’s clear that, even with perfect hindsight, the best strategy would have been counter-intuitive to the wisdom of long-term investing.

For more information, read our full 2018 year in review.

What’s the investment team’s outlook for the year ahead, and with that in mind, have you made any changes to the fully managed portfolios?

We haven’t made any changes to the portfolios. Financial markets have moved to price in a very high probability of a recession in the US. Looking at economic data, although there’s a slowdown globally, particularly in China and continental Europe, the US economy looks OK. And as such, as an investment team, we don’t believe there’s going to be a recession this year.

Provided the global economy doesn’t go into a sharp slowdown, we expect to see good performance from global equities this year.

That said, we expect volatility will be here to stay. 2017 had a very low level of volatility, and that made it unusual. We expect the normal state of markets, with volatility as a key feature, to carry on from 2018 into this year.

Customer question

This month’s customer question comes from Ian on Facebook. He asks:

“Could you comment on how you will protect customers from the whims of the market so as to avoid a repeat of Q4 2018?”

When it comes to protecting against the whims of the market, it’s important to make it clear that we won’t – and can’t – try to mitigate against all losses like we saw in the final three months of 2018. As an example, if you’d been holding 100% in equities at the end of September, you would have had to move to 85% in bonds and 15% equities just to not experience a loss over those months – not even to produce a gain.

To then try to move back into equity markets at the right time to pursue long-term returns would make this approach a fool’s errand in our view. This is because taking this approach would mean either exacerbating losses or missing out on participating in the big upside from equity market recoveries. For example, leaving the equity markets before Christmas would have meant missing out on the 5% rally in the US equity market on Boxing Day.

From history, we see that a lot of the gains made in equity markets take place suddenly, often on single days. Staying invested in equity markets also means dividends are received, which we reinvest on behalf of all customers to keep portfolios growing.

Trying to time the markets in the midst of big swings in equity markets would be counterproductive in the long run. Instead, while we know it’s difficult, we encourage customers to become accustomed to this volatility, as it’s part and parcel of the way markets produce long-term returns.

About this update

This update was filmed on 8th January 2019 and covers figures for the full month of December 2018 unless otherwise stated. Data source: Bloomberg, Macrobond

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.