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On the latest edition of Market Week in Review, Mark Eibel, director, client investment strategies, and Research Analyst Brian Yadao discussed 2018 market performance, the ongoing volatility in markets, the U.S. jobs report for December and projections for fourth-quarter earnings season.

2019 growth projections: The cause for the Q4 market selloff?

Looking back at 2018, Eibel noted it was an unusual year for U.S. equities, with three-quarters of mostly positive returns, followed by a stomach-churning fourth quarter that saw the S&P 500® Index tumble 14%. The fourth quarter selloff occurred despite solid economic data and near-record low unemployment rates in the U.S., Eibel said, leading many to wonder why returns took such a hit.

“2018 is a great lesson in how the market is typically a forward-looking mechanism,” Eibel stated, “with investors often concerned more about what’s coming down the pike than what’s happening in the here-and-now.” The fourth quarter of 2018, he said, showed that markets were looking ahead to 2019 and the projections of a slowdown in economic growth and corporate earnings that accompanied it. Likewise, much of the market gains in 2017 were likely driven by the stellar growth forecasts for 2018, he said.

New year, same story: Volatility continues in markets

To say 2019 has kicked off on a volatile note in markets would probably be a bit of an understatement, Eibel said, noting the rollercoaster ride for stocks included a 660-point drop in the Dow Jones Industrial Average on Jan. 3, followed by an approximately 700-point gain as of midday Jan. 4.

So, what’s responsible for the continued whiplash? The same host of issues that plagued investors through much of last month, Eibel said. “From a market perspective, it’s essentially December 35th,” he quipped, “as trade talks between the U.S. and China, U.S. Federal Reserve monetary policy, the partial government shutdown in the U.S. and the Brexit saga continue to hound markets.” In other words, there’s a tremendous amount of information for markets to process, he said. Projections of a slowdown in the U.S. economy—Eibel and the team of Russell Investments strategists expect GDP (gross domestic product) growth of roughly 2.2% or 2.3% this year—only further compound matters, he added.

A tale of two reports: Strong employment gains and weaker manufacturing numbers in U.S.

The December employment report for the U.S., released Jan. 4 by the Bureau of Labor Statistics, is a perfect example of the difficulties markets are having getting a read on the state of the economic landscape, Eibel said. The country added 312,000 jobs last month—a very strong number that was significantly higher than consensus expectations, he noted. On the other hand, the Institute for Supply Management’s index, which gauges manufacturing activity in the U.S., showed a notable slowdown in December, Eibel said—consistent with lower numbers in Europe and China.

“Conflicting signals like these are what the market is going to be processing going forward,” he stated. So, what could make the market lean more in either direction—up or down—in the weeks ahead? Earnings season, Eibel said.

Q4 earnings season projections

Eibel and the team of Russell Investments strategists anticipate that fourth-quarter earnings in the U.S. will come in around 10% or a little higher. “On an absolute basis, that’s a nice year-over-year growth,” Eibel remarked, “but the market is likely to view this in comparison to the 20% to 25% earnings growth experienced during the third quarter of 2018.” In addition, moving forward, quarterly earnings—when compared on a year-over-year basis—will become more of an apples-to-apples comparison, Eibel said, as the impact of the December 2017 tax reform bill will be reflected in both numbers.

“The key issue that markets will probably be looking at as reports start trickling in is what companies are saying about their revenue,” he said, noting that decreased revenue projections from Apple for the first quarter of 2019 sent stocks tumbling on Jan. 3.

All told, Eibel believes that markets are likely to remain volatile in the weeks ahead, which may help make the case for a globally diversified portfolio. “Right now, we’re seeing different asset classes perform differently at different times,” he concluded, “and this looks to continue for the foreseeable future.”