Requiem For 2018: A Visual Retrospective

Well, it’s officially 2019, which I suppose means it’s time to take a sweeping look back at the year that was.

On 2018, we can just grab and modify a quote from Silky Johnson (one of the many classic characters from the Chappelle Show):

Well, well, well! What can I say about 2018 that hasn’t already been said about Afghanistan? It looks bombed out and depleted.

If there’s one overarching lesson from last year, it’s probably that Donald Trump’s policies (both domestic and foreign) simply cannot coexist peacefully with Fed tightening. Fiscal stimulus managed to engineer the “sugar high” Trump was after, but it also i) forced the Fed to lean more hawkish than they otherwise might, ii) exacerbated the QT impulse by further distorting the supply/demand imbalance in the Treasury market, thereby sapping liquidity from other assets.

Meanwhile, Trump’s combative stance on trade and foreign relations and his worsening legal woes and penchant for turning the White House into a reality TV show together conspired to undercut confidence.

The visual tour of 2018 starts in the U.S., where stocks had their worst year since the crisis.



The Russell 2000 suffered a grievous peak-to-trough drawdown, shattering the illusion that small-caps were more insulated from the trade war and erasing the “Trump bump”, where that’s defined as outperformance versus global equities.



XIV went the way of the dinosaurs in early February when the Seth Golden crowd blew up amid one of the most dramatic episodes in market history as the rebalance risk inherent in levered and inverse VIX ETPs was realized on February 5.



The FANG+ index finally buckled under its own weight, collapsing in the back half of the year and deep-sixing myriad “asset managers” both real (on the buyside, where hedge fund VIPs and consensus longs were crushed, leading to massive de-netting/de-grossing/de-beta’ing in October) and imagined (would-be asset managers who, by virtue of the post-crisis easy money regime, convinced themselves and “clients” that managing money is as easy as buying ETFs and tweeting all day). The bars are monthly gains/losses for the FANG+:



Here’s the sector breakdown for the S&P:



The market freaked itself out in early December when the 2s5s and 3s5s inverted, creating a self-feeding recession narrative that threatened to bring forward end-of-cycle trades. Investors were on the verge of reverse-engineering a growth slowdown.



Amid the turmoil, the market increasingly expects easing from the Fed in 2020.



As the market priced out the Fed’s rate path, steepening ensued and everyone moved on to a new obsession: credit. To be sure, there was already a credit obsession prior to December. IG had been under pressure all year and HY for months, but late in December, the fearmongering hit a fever pitch. Spreads have widened out to levels last seen in early 2016, when crude was spiraling into the 20s and we were mired in an earnings recession stateside.



The ETF flows story tells you everything you need to know about how investors are feeling with regard the prospects for credit.



Meanwhile, money poured into short-term Treasury products as “cash” once again became a viable asset.



3M LIBOR rose above the yield on the Barclays Global Agg for the first time since the crisis.



Financial conditions tightened, turning the screws on risk assets and raising concerns that the Fed stepped into “policy mistake” territory with the December hike and Powell’s tone deaf press conference.



Breakevens are collapsing, underscoring the policy mistake story and 2-year reals are on the rise, creating stiff competition for increasingly shaky risk assets.



Bottom-up liquidity is severely impaired, exacerbating wild swings in equity markets.



Despite the prospect of a decelerating US economy and a dovish pivot from the Fed, “long USD” is (arguably) the most crowded trade on the planet.



Across the pond, it was the worst year for the Stoxx 600 since the crisis.



The pain was particularly acute in banks and trade-sensitive sectors.



Here’s a look at the country benchmarks versus the Stoxx 50:



In Italy, concerns about the populist coalition’s commitment to budget discipline sparked a mini-crisis. In late May, the BTP market suffered a meltdown as bid/asks blew out amid a harrowing spike in 2-year yields.



Italian financials were crushed, 10-year yields surged and “lo spread” ballooned wider as the budget crisis worsened.



Trump’s trade war and ongoing signs of economic deceleration piled pressure on Chinese equities. In October, margin call jitters tied to the pledged stock loan problem exacerbated volatility and official efforts to prop up the market created wild swings.



More generally, Asian equities were beset with trade worries, growth concerns and Fed tightening jitters. It was a tough year.



Japanese shares fell into a bear market, and are now the cheapest in five years on a forward multiple.



But the currency headwind could get stronger going forward as the prospect of BoJ tweaks and safe-haven flows bolster the yen, which was stronger against the dollar for a third consecutive year.



Crude had a wild 2018, torn between, on one hand, Trump’s efforts to squeeze Tehran (bullish), OPEC’s pre-existing efforts to support prices (bullish), the new OPEC+ supply cuts (bullish) and, on the other, Trump’s demands for lower prices (bearish), Trump’s exemptions from Iran sanctions (bearish), surging U.S. production (bearish) and global growth concerns (bearish).



November and December witnessed multiple single-session crashes, some exacerbated by momentum chasing and gamma effects.



Finally, here’s commodities more generally (top pane), cryptos (middle) and gold (bottom), with helpful annotations.



And with that, we’ll close the book on 2018 without further editorializing, other than to say that your consensus trades for 2019 are: “long Walls” and “long Wheels”.

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6 thoughts on “Requiem For 2018: A Visual Retrospective

  1. Widespread pessimism often is a contrarian indicator. “Often” is the operative word. With Trump at the helm, 2019 is looking like the year the over-levered debt-fueled global economy finally finds its iceberg.

  2. I tried to put wheel and wall as ticker. The chart suggested Wheels India Ltd and Wall Street Finance Ltd, both from India. Maybe a sign? The NIFTY50 didn’t perform so badly compared to Europe & US.

    The Dax commonly used includes dividends, it’s a total return index. The dax calculated as other indexes made even worse than -18%, it made -21%.
    This vs Italian benchmark FTSEMIB40 at -16%. It says a lot about that 2018.

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