Markets & Economy

Monthly Market Review

December 2018
T. Rowe Price

Stocks endured their worst month since 2008—and their worst December since the 1930s—wiping out all gains for the year to date and pushing most of the major indexes into bear market territory, down more than 20% from their recent highs. The narrowly focused Dow Jones Industrial Average escaped a bear market downturn, but just barely—the index was down by 19.4% at its low on December 26. Markets were also exceptionally volatile, with the S&P 500 Index experiencing 13 intraday swings of over 2% and one of over 5%. Within the S&P 500 Index, energy, financials, and industrials shares suffered double-digit declines, while the typically defensive utilities sector held up best but still fell slightly over 4%. The month’s losses closed out the worst year for the major indexes in a decade.

U.S. Indexes
Total Returns

 

December

Year-to-Date

Dow Jones Industrial Average

-8.59%

-3.48%

S&P 500 Index

-9.03 -4.38

Nasdaq Composite Index

-9.48

-3.88

S&P MidCap 400 Index

-11.32

-11.08

Russell 2000 Index

-11.88

-11.01

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended December 31, 2018. The returns include dividends based on data supplied by third-party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

Growth Slowdown Weighs On Sentiment

Economic concerns that had surfaced the previous month intensified in December and appeared to bear much of the blame for the market’s dismal performance. Stocks fell sharply on December 7, following the release of the Labor Department’s closely watched payrolls report, which missed expectations. Later in the month, the Commerce Department reported that core (excluding the volatile aircraft segment) capital goods orders had declined in November, seemingly confirming a slowdown in business investment that had begun in the third quarter. Not all the month’s economic signals were negative—a recent rise in weekly jobless claims seemed to have come to an end, at least temporarily, and some housing data were encouraging. Retail sales figures were also strong, and a report on robust holiday spending helped arrest the market’s slide the day after Christmas.

Nevertheless, a decline in long-term bond yields appeared to confirm a general softening in economic conditions. Investors focused on a phenomenon that has previously signaled an oncoming recession—at the start of the month, the Treasury yield curve inverted, with the yield on the two-year Treasury note higher than that on the five-year note. T. Rowe Price managers observe that inversions can precede recessions by many months or even years, however, and recent central banks’ efforts to suppress long-term interest rates may currently be making yield curve inversions less reliable as a recession indicator.

Fed Fails To Come To The Rescue

Indeed, monetary policy seemed to take a greater share of the spotlight in December than it has in some time. As worrisome or at least muted economic signals rolled in from both the U.S. and overseas, hopes grew that the Fed might announce a pause in its tightening program in response. Federal Reserve Chairman Powell’s comments in late November that interest rates are “just below” a neutral level that neither stimulates nor restricts economic growth also sparked hopes for a dovish turn in Fed policy. President Donald Trump was among those urging the Fed to change course, arguing in tweets that raising rates in the current environment would be a “mistake.”

Markets fell sharply as these hopes were dashed on December 19, when the Fed met and raised short-term interest rates for the fourth time in the year. Investors seemed especially discouraged that policymakers revealed their expectations for additional hikes ahead, although a majority of those on the rate-setting committee now expect two hikes in 2019 instead of three. The president was vocal in his criticism of the Fed’s actions, and rumors surfaced that he was exploring replacing his recently appointed Fed Chairman—further weighing on sentiment.

Rate hikes were not the only source of policy uncertainty. The partial government shutdown at midnight on Friday, December 21, seemed to have a broader impact on stocks and may have been the primary factor in the S&P 500 suffering its worst week since August 2011, when Congress almost failed to approve an increase in the federal debt limit. In an effort to calm the markets over the following weekend (December 22 and 23), Treasury Secretary Steven Mnuchin issued a press release stating that he had been in contact with executives from the country’s major banks and had been assured that they were suffering no liquidity problems. By raising a concern that had not been apparent to most investors, however, his reassurances seemed to have the opposite effect, and markets plunged again when they reopened Monday. Health care stocks suffered an additional blow during the month after a federal judge in Texas ruled the Affordable Care Act unconstitutional, threatening subsidies to insurers and providers.

Hopes Waver For Progress In China Trade Talks

The most prominent policy question remained whether the trade standoff with China would intensify in the coming months, and December brought a range of conflicting signals. Stocks got a boost on December 3, the first trading day of the month, following the White House’s assertion that considerable progress had been made in talks between Presidents Trump and Xi Jinping at the G-20 summit in Argentina. According to President Trump and his aides, China had promised to increase agricultural imports from the U.S. and lower auto tariffs, while the U.S. would hold off on threatened tariff hikes for 90 days.

The indexes surrendered their gains almost immediately, however. The S&P 500 experienced its biggest single-day drop of the month on December 4, after Chinese officials failed to acknowledge many of the details in the purported agreement, and the administration itself offered conflicting statements over when the clock would start on the 90-day postponement. Investors also appeared to respond to a series of tweets from President Trump, in which he questioned whether a “real deal” was possible with China and referred to himself as a “Tariff Man.” The appointment of U.S. Trade Representative Robert Lighthizer—viewed by many as a trade hawk—to oversee negotiations seemed to weigh further on sentiment, as did news of the arrest of a high-profile executive of Chinese telecom giant Huawei on suspicion of violating Iranian sanctions. Nevertheless, reports of new trade talks and a tweet from President Trump reporting “big progress” in a call with the Chinese leader seemed to help the market end the month on a positive note.

No Boom Means Bust Is Unlikely

While overall global growth is likely to slow in 2019, T. Rowe Price managers generally do not anticipate a recession in the U.S. and expect some rebound in European and Chinese growth. The Fed has completed most of its anticipated tightening, making further rate hikes less of a challenge. The auto and housing sectors in the U.S. have slowed as rates have risen, but the types of distortions that are typically apparent at the end of a market cycle are conspicuously absent—providing little threat of a boom being followed by a bust. The current environment has not seen a widespread misallocation of capital and euphoria in certain sectors like what occurred in telecom infrastructure in 1999 and housing in the mid‑2000s.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Developed non-U.S. equity markets declined in December, in line with a sell-off in U.S. stocks, which suffered their worst December since the 1930s. Ongoing U.S. trade tensions with China, rising short-term U.S. interest rates, and worries about slowing global growth weighed on investor sentiment. Within the MSCI EAFE Index, all 10 sectors declined, with losses led by health care and financials. Utilities was the sole gainer, up 0.89%.

Growth stocks in the EAFE index lost 4.81%, in line with value shares, which returned -4.86%. Emerging equity markets also lost ground but generally held up better than developed markets. Stocks in Mexico, Saudi Arabia, the Philippines, and Peru bucked the downward trend and logged positive results.

International Indexes
Total Returns

MSCI Indexes

December

Year-to-Date

EAFE (Europe, Australasia, Far East)

-4.83% -13.36%

All Country World ex-U.S.A.

-4.49

-13.78

Europe

-4.60

-14.32

Japan

-6.66

-12.58

All Country Asia ex-Japan

-2.66

-14.12

EM (Emerging Markets)

-2.60

-14.25

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, MSCI.
All data are in U.S. dollars as of December 31, 2018. This table is shown for illustrative purposes only and does not represent the performance of any specific security. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Brexit Woes And Italian Budget Debate Add To Selling Pressure On European Stocks

Equities in Europe lost more than 4%, in line with the global rout and as investors focused on ever-changing developments regarding Brexit and Italy’s standoff with the European Union (EU) about its planned budget deficit. Germany’s DAX Index, the broadest measure of shares in Europe’s largest economy, fell into bear market territory at the beginning of the month, having dropped more than 20% since its January 23 peak. The UK’s FTSE 100 Index also lost ground in December and suffered its worst yearly decline in a decade, as the ongoing Brexit debate threatened to topple Prime Minister Theresa May’s government. Italy remained the epicenter of European risk with Italian stocks down about 3%. However, Italian stocks pared earlier losses after the country reached a budget agreement with the EU in which it would avoid EU disciplinary measures. The Italian legislature passed the budget just before the end of the year.

ECB Cuts Growth Forecasts And Confirms End To Bond‑Buying Program

The European Central Bank (ECB) confirmed that it was ending its monthly bond-buying program at the end of the year and left its key lending rates unchanged. The central bank moved ahead with its decision to end quantitative easing despite signs of weakness in the economy. ECB President Mario Draghi admitted that the change was made despite eurozone risks being skewed to the downside because of trade tensions, geopolitical turbulence, and volatility in financial markets. The bank also cut its eurozone growth forecast slightly for 2018.

Indeed, eurozone data continued to underscore this regional slowing and the effect trade spats are having on eurozone manufacturers and their growth expectations. The IHS Markit flash eurozone purchasing managers’ index data indicated the slowest rate of eurozone business growth in over four years.

Japanese Equities Enter Bear Market

Stocks in Japan underperformed the broad EAFE index, falling more than 6% for the month in U.S. dollar terms. The Tokyo-based Nikkei 225 Index entered bear market territory, falling more than 20% from its year-to-date high reached in October. Throughout the month, Japanese equities seemed to track the U.S. stock markets. According to Archibald Ciganer, a Tokyo-based T. Rowe Price equity portfolio manager, Japanese equities faced many of the same pressures in 2018 that were felt in other global markets, including rising U.S. interest rates, a slowing Chinese economy, and a breakdown in U.S.–China trade relations. Ciganer notes that the pullback in Japan also reflected a narrower market leadership, with fewer stocks posting positive returns as the near-perfect conditions for equity markets in 2017 faded.

Near month-end, the Bank of Japan’s minutes seemed to indicate that policymakers were concerned about slowing global growth and below-target inflation. The yield of the 10-year Japanese government bond dropped into negative territory at the end of December for the first time since 2017.

Emerging Markets Fall But Outperform Developed Market Peers

Emerging markets stocks fell in December, as the MSCI Emerging Markets Index declined 2.60%, posting its biggest loss since 2015 as trade tensions and rising short-term U.S. interest rates curbed investor appetite for riskier assets. Declines were led by Asian markets, with Chinese stocks down 6%. Data pointed to a deepening economic slowdown, exacerbated by U.S. tariffs, which are expected to detract from China’s growth rate.

Latin American stocks declined but held up better than other international markets, thanks to gains in Mexico and Peru. Mexico’s stocks gained more than 3%. Mexico’s central bank raised its benchmark interest rate to a 10‑year high of 8.25% and warned that the policies of the country’s new leftist president, who took office on December 1, were contributing to an acceleration in inflation. The current environment poses “significant risks” that could affect Mexico’s economy, growth potential, and prices in the medium and long term, Banxico said.

The MSCI Europe, Middle East, and Africa Index fell 1.57%. Turkish stocks fell more than 5%. Turkey reported that its economy shrank 1.1% in this year’s third quarter on a quarterly basis and rose a worse-than-forecast 1.6% from a year ago, its slowest annual expansion since 2016. The quarterly contraction signaled that Turkey may be slipping into recession. Despite the weak data, Turkey’s central bank left its benchmark interest rate unchanged. Russian stocks shed over 3%. Russia’s central bank unexpectedly raised its benchmark rate for the second time this year as inflation approached the bank’s 4.0% target. The central bank governor said that the hike was a proactive move aimed at curbing inflation risks spurred by a value-added tax increase starting in January and the possibility of new U.S. sanctions.

Outlook: Global Growth Is Slowing

We expect global growth to moderate against the backdrop of ongoing trade tensions, slowing Chinese demand, and geopolitical disrupters, including political uncertainty in Italy, France, and the UK. Trade-driven economies may be the hardest hit going forward. A continuation of trade tensions could exacerbate this slowdown, while Chinese monetary and fiscal stimulus have the greatest potential to drive global growth higher. Lower oil prices should give growth a boost among oil importers, including Europe, China, and India. While some of the political risks that had hung over emerging markets countries, such as elections in Brazil and Mexico and severe currency weakness in Turkey, have eased, myriad geopolitical and trade issues remain that could spark risk-related selling and derail markets. Other challenges to the outlook for global equities include the possibility of central bank policy missteps and the rising popularity of anti-establishment and populist political parties.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Treasury yields generally decreased in December as weakening global economic growth and tumbling stock prices increased the attractiveness of safe‑haven government debt and other lower-risk bond sectors. Despite the Federal Reserve’s decision to raise the federal funds rate for the fourth time in 2018, yields on all but the shortest-maturity Treasury securities declined. The benchmark 10-year Treasury note’s yield fell to 2.69% by month‑end, its lowest level since late January 2018, and the two-year Treasury note’s yield dropped to its lowest point since June. Bond prices and yields move in opposite directions.

Total Returns

Index

December

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

 1.84%

 0.01%

 

J.P. Morgan Global High Yield Index

-1.83

-2.37

 

Bloomberg Barclays Municipal Bond Index

 1.20

 1.28  

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

 2.22

-2.15

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 1.35

-4.26

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 1.81

 0.99

 

Past performance is not a reliable indicator of future performance.
Figures as of December 31, 2018. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: Third-party vendor RIMES. Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Slowing Growth, Lower Inflation Expectations Contribute To Lower Treasury Yields

Besides concerns about slowing growth and equity volatility, the ongoing U.S. trade dispute with China and, later in the month, the partial U.S. government shutdown may have also contributed to the risk-off environment. Moreover, bonds generally benefited from forecasts for a slowdown in the pace of Fed rate hikes as well as a drop in inflation expectations that resulted from falling oil prices. The yield on the 10-year Treasury note decreased after reaching a seven-year closing high of 3.24% in November. For the full year, Treasury yields on all maturities still finished higher.

The Treasury yield curve partially inverted in December for the first time since the global financial crisis, with the yield on the one-year Treasury moving higher than yields on two- and three-year maturities at month-end. However, the 2- to 10-year portion of the yield curve, which is closely watched because of its accuracy in predicting recessions, didn’t invert. Despite the pause in the flattening trend in December, during 2018 the yield premium offered by the 10-year Treasury versus the two-year shrank from 0.51 percentage points to 0.21.

Fed Raises Rates But Projections For Future Increases Move Lower

As expected, the Fed raised rates by a quarter percentage point for the fourth time in 2018 at its December meeting, lifting the federal funds target rate to a range of 2.25% to 2.50%. The central bank’s policymakers also predicted that two rate hikes will be needed in 2019, down from their previous forecast of three more hikes. The Fed’s lower number is still well above the outcome implied by the futures market, which is not pricing in any additional rate increases in 2019.

U.S. Treasury Yields

Maturity

November 30

December 31

3-Month

2.37%

2.45%

6-Month

2.52

2.56

2-Year

2.80

2.48

5-Year

2.84

2.51

10-Year

3.01

2.69

30-Year 3.30 3.02

Source: Federal Reserve Board.

Higher-Quality Bonds Lead U.S. Market

The highest-quality segments of the taxable U.S. investment‑grade bond universe, Treasuries and mortgage‑backed securities, produced the strongest returns. Investment‑grade corporate bonds also produced positive returns but underperformed the broader Bloomberg Barclays U.S. Aggregate Bond Index. Equity volatility weighed on investment-grade corporates, and traders reported challenging conditions with limited liquidity in the market. The sector experienced outflows, but limited new issuance provided support.

Tax-free municipal bond returns were also helped by a limited supply of new bonds. According to Bond Buyer data, supply shrank 24% in 2018 compared with 2017’s total. A rebound in demand also buoyed munis as money began to flow back into the muni sector in December after 12 weeks of outflows. Lower-quality segments of the muni market, notably high yield tobacco bonds and Puerto Rico debt, underperformed for the month but still finished the year with robust results.

High Yield Bonds Under Pressure From Equity Volatility, Falling Oil Prices

High yield bonds, whose performance is more closely correlated with equities than other fixed income segments, were under pressure from the stock sell-off. In addition, energy sector bonds, which make up a large portion of the high yield benchmarks, underperformed as oil prices plunged to the lowest levels in over a year amid concerns about oversupply. High yield credit spreads, which measure the additional yield offered by a bond relative to a comparable-maturity Treasury security, reached their widest level in more than a year; however, a lack of new issuance helped limit the downturn in the high yield market somewhat.

Floating rate bank loans, which generally benefit in a rising rate environment, also came under pressure in December as investors revised down their expectations for future Fed rate hikes.

Japanese 10-Year Government Bond Yield Falls Below 0%

Similar to Treasuries, yields on developed market government bonds outside the U.S. decreased amid slowing growth forecasts and investor demand for low-risk securities. The yield on the 10-year Japanese government bond (JGB) dipped below 0% near month-end for the first time since 2017. Bank of Japan Governor Haruhiko Kuroda said that economic risks are tilted toward the downside and that officials are comfortable with JGB yields moving back into negative territory. Meanwhile, the European Central Bank formally ended its quantitative easing program but said it doesn’t expect to begin lifting interest rates until the summer.

Emerging Markets Bonds Produce Positive Results

Emerging markets bonds held up relatively well and produced positive results. Locally denominated emerging markets debt benefited from the strength of some local currencies, which aided results in dollar terms, and generally positive news at the country-specific level. Sentiment toward Mexican assets improved following the government’s recent decision to sweeten the terms of its original proposal to buy back some bonds issued to fund the construction of a new Mexico City airport—a project that the new president, Andrés Manuel López Obrador, said he would cancel before he took office. Another favorable factor was the new administration’s budget proposal, which seemed to ease investor concerns that the government would significantly increase spending. South Africa also produced good news as the country emerged from a brief recession.

Outlook: Markets Adjusting To Less Accommodative Monetary Policies

Diverging monetary policy is likely to be a catalyst for volatility in 2019, says Andy McCormick, head of fixed income at T. Rowe Price. Since the recovery from the 2008–2009 global financial crisis, global credit cycles have grown increasingly out of step, and McCormick expects that trend to continue in 2019. The low volatility seen in many major markets in recent years wasn’t sustainable without the ample liquidity provided by the world’s major central banks in the wake of the financial crisis, McCormick notes. Now, with the Fed shrinking its balance sheet and the European Central Bank shifting to a less stimulative posture, markets are searching for a new footing at more sensible valuation levels given less accommodative monetary conditions.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes declined significantly in a volatile December, pushing all major benchmarks to their lowest levels in over a year before slightly rebounding in the final business days of the month. Nevertheless, most major U.S. indexes entered or flirted with bear market territory―down more than 20% from their recent highs―during the month. Trade tensions between the U.S. and China were once again a primary driver for market weakness. Stocks got a boost on the first business day of the month after President Donald Trump and Chinese President Xi Jinping agreed to a 90-day tariff “truce” to allow further trade negotiations between both parties. Any positive ramifications from the truce announcement were extremely short-lived, however, after news surfaced that Canadian officials arrested, at the request of the U.S., a high-profile Chinese telecom executive on suspicion of violating Iranian sanctions. A possible reason for optimism about trade talks is that the U.S. Department of Agriculture confirmed that China resumed buying U.S. soybeans after having cut off purchases a few months earlier.

Concerns over U.S. monetary policy, especially in light of recent U.S. financial market weakness and signs of slowing growth overseas, weighed on sentiment throughout the month. As generally expected, the Fed decided to raise its federal funds rate target—for the fourth time in 2018—on December 19. Although Fed policymakers signaled that they expect only two rate hikes in 2019, as opposed to a previous projection of three, stocks plunged as many investors were hoping for a signal that the central bank may pause rate increases fairly soon.

Large-cap shares held up better than mid- and small-caps. The large-cap S&P 500 Index returned -9.03% versus -11.32% for the S&P MidCap 400 Index and -11.88% for the small-cap Russell 2000 Index. As measured by various Russell indexes, growth stocks held up better than value across all market capitalizations.

U.S. Stock Returns
  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index

December

-9.03%

-11.32%

-11.88%

Year-to-Date

-4.38 -11.08 -11.01

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of December 31, 2018.
Note: Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
The S&P 500 Index and S&P MidCap 400 Index are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index and S&P MidCap 400 Index.

In the large-cap universe, as measured by the S&P 500 Index, all sectors produced negative returns. Energy shares extended their recent decline and performed worst. In an attempt to boost oil prices, OPEC and some non-OPEC oil-producing nations announced on December 7 that they would cut production. The announcement failed to support the oil market, and prices fell more than 10% for the month as risk assets sold off. Financial shares sank during the month, as falling long-term interest rates signaled narrower lending margins for banks. Economically sensitive industrials and business services stocks also underperformed the broad index. Utilities stocks, which are often perceived as a bond market proxy due to relatively high dividend yields, held up much better than all other sectors as long-term interest rates declined.

Domestic investment-grade bonds produced positive returns. The Bloomberg Barclays U.S. Aggregate Bond Index returned 1.84%. Treasury bill yields rose and longer-term interest rates declined; in fact, parts of the Treasury yield curve inverted a few times during the month. Specifically, five-year Treasury yields were occasionally lower than two- and three-year Treasury yields. The more closely watched 2- and 10-year portion of the yield curve did not invert, but the spread (difference) between 2- and 10-year yields is the narrowest it has been since 2007.

U.S. Bond Returns
  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

December

 1.84%

 1.20%

-1.83%

Year-to-Date

 0.01

 1.28

-2.37

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of December 31, 2018.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

In the investment-grade universe, long-term Treasuries performed well, as increased demand for the relative safety of government bonds pushed long-term yields lower and bond prices higher. Mortgage-backed securities and corporate bonds also produced positive returns. Asset-backed securities edged higher. Tax-free municipal bonds appreciated but underperformed the broad taxable bond market. High yield bond yields declined as credit spreads—the yield difference between higher- and lower-quality bonds—widened. Falling oil prices weighed significantly on issuers in the energy sector.

Stocks in developed non-U.S. equity markets declined but held up better than U.S. shares. The MSCI EAFE Index, which measures the performance of stocks in Europe, Australasia, and the Far East, returned -4.83%. Developed Asian markets were mostly negative, but Hong Kong was flat for the month. Japanese shares fell about 7%, as struggling consumer demand and weakness in corporate investment caused Japan’s gross domestic product (GDP) to shrink at a 2.5% annualized rate in the third quarter, much worse than the 1.2% contraction initially reported. European stock market returns were negative. German shares were hit particularly hard, falling roughly 6%, as the broad German DAX Index fell into bear market territory. Italian shares dropped more than 3% but pared earlier losses after the country reached a budget agreement with the European Union (EU) in which Italy would avoid EU disciplinary measures. The Italian legislature passed the budget just before the end of the year. British shares declined nearly 4% amid uncertainty about Prime Minister Theresa May’s ability to convince parliament to vote in favor of her proposed Brexit deal in January. Stocks in Norway―one of Europe’s largest oil producers―were hurt by falling oil prices and lost more than 6%.

Non-U.S. Stock Returns
  MSCI EAFE Index MSCI Emerging Markets Index

December

-4.83%

-2.60%

Year-to-Date

-13.36

-14.25

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of December 31, 2018.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Emerging markets stocks fell but held up better than developed markets. The MSCI Emerging Markets Index returned -2.60%. In emerging Europe, Turkish shares fell more than 5% in dollar terms as the lira weakened slightly. Economic data released during the month showed that the country’s GDP only expanded 1.6% in the third quarter, which marked a significant slowdown from the first two quarters of the year. Russian stocks declined more than 3% as oil prices fell sharply. Emerging Asian markets generally declined. Chinese stocks fell over 6%, while the A shares market fell less than 4%, even though the central bank created a new monetary tool intended to boost credit for small and private companies. Shares in Malaysia, the Philippines, and Indonesia bucked the negative trend and edged higher for the month. In Latin America, Mexican shares advanced over 3%. Mexico’s new president, Andres Manuel Lopez Obrador (AMLO), took office on December 1, and stocks were somewhat supported when AMLO announced plans to buy back some of the bonds issued to construct a new airport in Mexico City. Before he took office, AMLO said that he would cancel this project. AMLO’s 2019 budget proposal was viewed as favorable by many investors, reducing fears that he would significantly increase government spending. Brazilian shares fell roughly 2% but rallied in the closing weeks of the month in anticipation of new president Jair Bolsonaro taking office on January 1, 2019. Investors are optimistic that Bolsonaro will pursue business-friendly reforms and pension reform in addition to keeping his promises to fight crime and corruption.

Bonds in developed non-U.S. markets generated positive returns in dollar terms. Bond yields fell and prices rose in various countries as investors fled equity market volatility. In addition, a weaker U.S. dollar versus various currencies boosted returns to U.S. investors. The European Central Bank kept its key lending rate unchanged and confirmed that it is ending its monthly bond-buying program at the end of December, as expected. Italian bonds performed very well for the month, after the country reached its budget deal with the EU. The Bank of Japan (BoJ) announced that it is keeping its accommodative monetary policy unchanged, which was also expected.

Emerging markets debt also posted positive returns but underperformed developed markets bonds. Local currency bonds fared about the same as dollar-denominated emerging markets debt. Currencies were mixed versus the dollar: The South African rand and Russian ruble declined versus the dollar, reducing local bond market returns to U.S. investors, but a stronger Mexican peso lifted local bond returns in dollar terms.

Non-U.S. Bond Returns
  Bloomberg Barclays
Global Aggregate
Ex-U.S. Dollar Bond
Index

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

December

 2.22%

 1.35%

 1.31%

Year-to-Date

-2.15

-4.26

-6.21

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of December 31, 2018.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Emerging markets stocks fell in December as the unresolved U.S.-China trade rift and rising U.S. interest rates dampened investor sentiment already battered by Wall Street’s slide. Trade tensions loomed in the background even after U.S. President Trump and his Chinese counterpart Xi Jinping met in early December and agreed on a 90-day truce in the trade battle to allow more time for talks. Disappointment that Federal Reserve Chairman Jerome Powell wasn’t as dovish as investors had hoped for in remarks following the central bank’s December 19 interest rate hike also curbed risk appetite. Finally, a batch of downbeat economic data in China added to global growth worries: At month-end, China reported that its manufacturing purchasing managers index shrank for the first time since 2016, the latest sign of a slowdown spurred by U.S. tariffs and Beijing’s deleveraging campaign. For the year, the MSCI Emerging Markets Index shed 14.25%, its biggest annual loss since 2015. Emerging markets bonds and currencies also notched their worst annual performance in three years, according to Bloomberg. Nine out of 11 sectors in the index fell, while only the consumer staples and utilities sectors rose.

Total Returns
MSCI Index December Year-to-Date
Emerging Markets (EM) -2.60% -14.25%
EM Asia -3.10 -15.16
EM Europe, Middle East, and Africa (EMEA) -1.57 -15.60
EM Latin America -0.75 -6.23

Past performance is not a reliable indicator of future performance.
All data are in U.S. dollars as of December 31, 2018. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: MSCI.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Chinese Stocks Retreat As Tariffs Weigh On Growth; Southeast Asian Stocks Mixed

  • Chinese stocks fell as a temporary truce struck by the U.S. and China on December 1 at the G-20 summit was outweighed by data pointing to a deepening economic slowdown. T. Rowe Price credit analysts reckon that current U.S. tariffs will likely shave from 0.5% to 0.7% from China’s annual growth rate, which Beijing has targeted at around 6.5% this year. 
  • Indian shares declined as slowing global growth and trade concerns offset the benefits of lower oil prices and stimulus measures. The Reserve Bank of India’s governor unexpectedly quit after clashing with the government over its demands to ease lending restrictions on state-run banks, raising fears about the Indian central bank’s autonomy.
  • In Southeast Asia, stocks in Indonesia, Malaysia, and the Philippines advanced but fell in Thailand. Central banks in Indonesia and the Philippines held their benchmark interest rates steady after several successive hikes in each country starting in May. However, the Bank of Thailand raised its key rate for the first time since 2011 and lowered its economic growth estimates for this year and next. The World Bank cut its 2018 growth forecast for the second time since October for Malaysia, which is untangling a huge corruption scheme involving a state investment fund.  

Brazilian Stocks Decline As Central Bank Stays On Hold; Mexican Stocks Gain As Peso Recovers

  • Brazilian stocks declined. Brazil’s central bank left its benchmark Selic rate unchanged at a record-low 6.5% for the sixth straight meeting and warned that the risk of slow growth leading to weaker-than-expected inflation had increased. The bank also trimmed its 2018 growth forecast for Brazil to 1.3% from a prior 1.4% estimate but kept its 2.4% growth forecast for next year unchanged.
  • Mexico’s stocks and currency each gained more than 3%. Mexico’s central bank raised its benchmark interest rate to a 10-year high of 8.25% and warned that the policies of the country’s new leftist president were contributing to inflation. The current environment poses “significant risks” that could affect Mexico’s economy, growth potential, and prices in the medium and long term, Banxico said. 
  • Andean markets were mixed: Stocks in Chile and Colombia each shed more than 3%, while Peruvian stocks advanced. Central banks in Chile and Peru kept their respective benchmark rates unchanged as expected after economic growth in each country slowed in the third quarter. Colombia’s central bank also left its key rate on hold, though most analysts anticipate the start of a tightening cycle in 2019.

Turkish Stocks Drop As Economy Teeters On Recession; Russian Stocks Fall As Inflation Picks Up

  • Turkish stocks fell more than 5%. Turkey reported that its economy shrank 1.1% in this year’s third quarter on a quarterly basis and rose a worse-than-forecast 1.6% from a year ago, its slowest annual expansion since 2016. The quarterly contraction signaled that Turkey may be slipping into recession. Despite the weak data, Turkey’s central bank left its benchmark interest rate unchanged.
  • Russian stocks shed over 3%. Russia’s central bank unexpectedly raised its benchmark rate for the second time this year as inflation approached the bank’s 4.0% target. The central bank governor said that the hike was a proactive move aimed at curbing inflation risks spurred by a value-added tax increase starting in January and the possibility of new U.S. sanctions.
  • South African stocks edged lower. South Africa emerged from its first recession in nearly a decade after reporting that its economy grew by a surprisingly strong annualized 2.2% in the third quarter from a revised 0.4% contraction in the prior period. The rebound is expected to be short-lived, however, as South Africa’s central bank and treasury have each forecast economic growth of under 1% this year.

Solid Fundamentals In Emerging Markets Offset Near-Term Risks

We are optimistic about the longer-term outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption. Emerging markets stocks are attractively valued relative to developed markets stocks.

Near-term headwinds include an escalation in global trade disagreements and an aggressive pace of monetary tightening by the Federal Reserve. However, we believe that emerging markets will be able to withstand a gradual tightening of U.S. monetary policy given that their financial positions have broadly improved in recent years. Economic growth is stable in most markets, and corporate earnings have recovered after years of disappointing performance. Nevertheless, we believe that careful stock selection will be crucial for producing good long-term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of January 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

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