2018: A year in charts

Eight charts highlighting some of the biggest financial stories of the year

December 13, 2018

1. Vix spikes

By the end of 2017, City pundits were warning that the unusually placid trading patterns seen through much of the year in equity markets could prefigure something a little more extreme – and so it proved. The CBOE Volatility index (Vix) spiked in the early part of February in response to an increase in negative option positions on the S&P 500 (SPX). It marked the largest daily movement in the so-called ‘fear gauge’ on record, with around $3.8 trillion wiped off the value of stock markets globally, although the losses weren’t confined to equities. Investors who had been profiting from the eerie calm in the lead-up to February, took a bath on the ‘short-vol trade’ – effectively bets against stock market volatility through exchange traded notes. The oscillations in the Vix, which tends to maintain an inverse correlation to equity prices, resulted in Credit Suisse liquidating one investment product – its Short Volatility Exchange Traded Note – and more than a dozen others were halted after their values sank toward zero. A relative period of calm ensued, although the Vix recently hit its highest level since February’s spike as stocks retraced on escalating global growth fears.

2. Oil prices slide

It started off so well. The oil industry was a risk-on trade through much of 2018, with underlying prices rising by 29 per cent to an annual peak of $86.42 a barrel recorded during the first week of October. Two months on and Brent crude is back under $60, with oil prices registering their biggest one-month decline in four years. Unless you’re trading in a seasonal cash crop, it’s hard to justify price swings of this magnitude, particularly for a commodity where the supply/demand balance is routinely monitored and assessed. We had been looking at a supply outage in the third quarter once US trade sanctions on Iran took hold, but the Trump administration unexpectedly issued waivers for eight countries, including major importers China and India. So crude continues to make its way out of the Strait of Hormuz just as global demand has started to leech away as growth turns sluggish. The good news is that there is a demonstrable link between falling oil prices and rising GDP, particularly in the biggest oil importing economies and emerging markets. The refining arms of the integrated oil majors are also set to benefit from the increased spread between prices for Brent crude and those of West Texas Intermediate.

3. Tightened times

US Federal Reserve chairman Jerome Powell is closing out 2018 with a hawkish tone on interest rates, stung perhaps by conjecture that he had become cowed in the face of persistent criticism by Donald Trump. The 45th US president and former Queens property developer takes a binary view of the subject: falling interest rates good; rising interest rates bad. It’s a good recipe for equity markets, particularly those in which valuations have been inflated on the back of a 10-year bull run. We witnessed a sharp sell-off in technology and consumer-discretionary stocks at the beginning of October, but, somewhat unusually, investors were also selling long-dated bonds. Even if the traditional negative correlation between equities and bonds has reversed, it’s likely to be temporary. With macro conditions deteriorating, it’s difficult to envisage that the ‘real economy’ will be supportive of risk assets through the course of 2019, hence the general rotation from growth to value. Concerns over a diminishing equity risk premium and FAANG valuations set events in motion in October, although the former is likely to be the chief catalyst for any subsequent sell-offs as investors take cover in government debt markets.

4. Brexit bashes the UK

“No one ever voted to be poorer” has been a popular refrain of those criticising the UK’s Brexit-supporting public. And indeed, the view that a so-called ‘no deal’ Brexit will do just that has been circulated widely this year. The government recently reiterated warnings that in the event of no deal the economy could be 7.7 per cent smaller than it would otherwise have been by 2035. Recent Bank of England analysis predicted even more severe impacts, including an 8 per cent fall in GDP in the first year of a “disorderly” Brexit – prompting criticism that the central bank had become a “politicised” exponent of Project Fear 2.0, and of the government’s lack of planning for a no deal outcome. With the rising prospect that we end up with an “accidental” no deal, such predictions could be put to the test come April 2019.

5. Car market stalls

There’s a direct correlation between a country’s GDP and business activity in its automotive industry, but auto dealers had to contend with a phalanx of additional considerations in 2018. The UK was already making its way through the wrong end of the consumer credit cycle, while the effects of the Volkswagen diesel scandal were still very much in evidence, with diesel vehicles now accounting for fewer than one in three of all new car registrations. Dealers have also had to adapt their business models to take account of the evolving patterns of car ownership, together with potential logistics problems depending on our eventual trading settlement with the EU. New car sales in the UK were down 20.5 per cent in September (when new numberplates come in) from a year earlier, partly reflecting bottlenecks at car testing centres across the EU.

6. Momentum hits a wall

Momentum has been a winning strategy in recent years – as Chris Dillow has shown with his ‘no thought’ portfolio, shares that have recently risen in value have, over the past decade, tended to keep rising thanks to indiscriminate buying simply in the hope of a higher price. And the problem of how to cost-effectively play this strategy has been solved by the advent of factor ETFs such as MTUM, shown in the chart above. But 10 years of outperformance ended abruptly this autumn – shares such as Fevertree Drinks that have benefited from the momentum trade have been hit the hardest as the markets have turned – a turn that has called in question whether momentum’s effects will continue into a weakening market where investors focus more on fundamentals, or whether the drivers of momentum will shift from growth to value (see page 96).

7. Bitcoin bloodbath

It has been almost a year since bitcoin peaked at nearly $20,000 – since then its fall from grace has been spectacular, dropping 80 per cent to below $3,400 this week, with other cryptocurrencies such as Ripple and Ethereum following the downward trajectory. Even as they rose last year critics were suggesting that crypto demonstrated all the hallmarks of a speculative investment mania, and so it has proved. Certainly, the idea that Bitcoin and other cryptocurrencies would prove a better store of value than cash or gold have been firmly laid to rest.

8. Populism powers ahead; populist vote share in Europe

While most of the UK’s political energy has been spent on the endless toing-and-froing of the country’s exit from the EU, the battle for Europe’s political soul has raged harder than ever in 2018. While Brexit is often interpreted as a symptom of a country slipping towards the right, the reality is that the UK has one of the least populist governments anywhere in Europe after elections this year – in Italy, Poland, Hungary and the Czech Republic the populist vote share is over 40 per cent, while populist parties have made major inroads in Germany, Sweden and France, where yellow-jacketed civil unrest has caused chaos this winter. Hardly the harmonious brotherhood that many remain supporters would have you believe, and as populist parties become the new mainstream a genuine threat to the old economic order of the bloc that could make Brexit look like a picnic