8 Money Lessons from 2018

The news cycle can teach us important economic and personal finance lessons. Here are my picks for 2018. Happy New Year!

1. When the Government Spends, the Economy Grows: The economic expansion (the second longest in U.S. history) got a big boost from the new tax law and by a surge in government spending. The combination likely increased GDP by about three percent in 2018, which would be the best showing since 2005.

2. The Labor Market Is Not Done Yet: The economy added just over 200,000 jobs per month, on average, the unemployment rate dropped to 49-year low of 3.7 percent, the broader rate fell and wages finally began to perk up, especially for lower income earners.

3. The Federal Reserve Still Matters…A LOT: Citing strong economic growth, the Fed hiked short-term interest rates by a quarter of a percent four times, pushing up the benchmark rate to 2.25 to 2.5 percent. Critics, including the President, worry that the central bank’s “autopilot” policy will slow down the economy and bring the era of easy money to an abrupt conclusion.

4. Trade/Tariffs: The Trump Administration enacted a number of tariffs: 10 percent on imported aluminum; 25 percent on imported steel; 25 percent on $50 billion worth of Chinese industrial goods; and 10 percent on another $200 billion of Chinese consumer goods. The U.S., Canada and Mexico signed on to the United States-Mexico-Canada Agreement (“USMCA” or “NAFTA 2.0”), which will require companies to use more locally produced steel and also to pay auto workers at least $16 per hour.

5. Year of Corrections and Bears: After a relatively placid couple of years, investors endured two corrections, defined as a drop of ten percent or more. But the damage was worse for many more companies, including the once vaunted FAANGs (Facebook, Apple, Amazon, Netflix and Google parent, Alphabet), all of which stumbled into a bear market, defined as a 20 percent decline from an asset’s 52-week high. Also taking a dive: crude oil, which peaked in October, government bond prices and Bitcoin, which dropped below $3,200 after rising above $19,000 a year ago.

6. Diversification Works, but Not Always: Almost every asset class moved in tandem (and in the wrong direction) in 2018, prompting some to proclaim “Diversification doesn’t work!” The point of asset allocation and diversification is that when one investment zigs, another zags. While there are years when the tried and true strategy does not work (see 2008 and 2015), over time it is the best bet for long-term investors. For example, from 2000 to 2010, which included the financial crisis, the annualized return of the S&P 500, including dividends, was just a paltry 1.4 percent per year. During those ten years, a portfolio of 60 percent equities (split among different types of stocks) and 40 percent fixed income had an annualized return of 7.83 percent. The numbers make the case.

7. (Some) Retail is Dead: RIP Toys R Us, which put Geoffrey the Giraffe out of a job and Sears, once the largest retailer in the U.S., filed for bankruptcy protection. At the same time, Amazon held a beauty contest for a second headquarters and was on pace to capture almost half of all online sales, according to eMarketer. Brick and mortar giants Walmart and Target spent a lot to eat away at some of Amazon’s dominance.

8. Your Identity is STILL Not Safe: A year after the Equifax data breach, hotel operator Marriott said that hackers have been stealing information from its Starwood subsidiaries reservation systems for almost four years. The breach, one of the largest in history, exposed information of up to 500 million customers.

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