The fourth quarter of 2018 witnessed a dramatic correction across all markets with most stock indices experiencing near double-digit declines for the quarter. This was the first major annual correction in the decade-long expansion of the markets since the Great Financial Crisis in 2008. Global economic activity weakened in most regions except the U.S. Several problem areas included stalling Chinese economic growth, ongoing trade and geopolitical tensions, and continuing tighter monetary policies. Commodity prices were largely affected as well with the price of oil dropping 38% in the fourth quarter.
The Canadian stock market fell 10.1% in the fourth quarter with the deepest losses taking place in December and resulting in one of the worst quarters in the past decade. The defensive industry sectors, including Consumer Staples, Utilities, Materials and Communication Services all did relatively well in the quarter. The cyclical growth stocks that had outperformed in the first half of 2018 were the hardest hit in the fourth quarter. The Energy sector was the worst performing sector, down 17.3%, despite government mandated production cuts to try to help shore up prices. The Canadian market was down 8.9% for the year.
The U.S. S&P 500 index returned -9.0 % in the fourth quarter (in Canadian dollars) and is up 4.0% in the past twelve months. Sector returns in Energy, Info Technology and Industrials were all weak in the fourth quarter. Most non-North American stock markets were also weak with the MSCI All World Index down 8.1% in the fourth quarter and down 1.0% for the year. Global stocks were negatively influenced by a number of factors including global trade friction, Brexit, the U.S.-China trade war and concerns around slowing global growth. Emerging Markets (-2.2%), Japan and Europe all experienced negative returns in the fourth quarter and for the year.
The Canadian bond market returned 1.8% in the fourth quarter of 2018 with a one-year return of just 1.4%. The strongest bond sectors in this quarter were Federal Government Bonds (2.8%) and Mid-Term Bonds (2.4%). The Bank of Canada increased its main policy rate again by 0.25% to 1.75% in October, 2018 which is now the highest rate in almost ten years. Bond yields fell in the fourth quarter in response to growing concerns over global and Canadian growth decelerating. The U.S. Federal Reserve also raised interest rates by 0.25% in December in response to their continuing strong economic growth and concerns of rising inflation.