The fourth quarter of 2018 saw negative equity sentiment across all asset classes, with the broader market as represented by the S&P 500 returning -13.52%. The retreat in the U.S. stock market over the final three months of the year was notable for its length and ferocity. By most measures, stocks narrowly avoided ending a nearly decade-long bull market. Value stocks beat their growth peers by 4% for the quarter. Large-cap stocks outperformed small-caps by 6.7%, and mid-caps, as a whole, had returns in between the two, but closer to large-caps. Economically sensitive sectors like energy, industrials, and information technology underperformed the broader market, while traditional safe havens like utilities, real estate, and staples lived up to their reputations by outperforming.
Myriad factors likely contributed to the sell-off. The first was the continuing trade war rhetoric between the U.S. and China. A 90-day detente announced in November provided a reprieve, but it turned out to be a brief one. Within the U.S., there was increased uncertainty about the pace and timing of the Federal Reserve’s interest rate hikes, in addition to the pace of its unprecedented unwinding of the balance sheet. While the economy remains at or near full employment, other economic measures could be interpreted as a sign of slowing growth, both in the U.S. and abroad.
The sukuk market was no exception to the move away from risk assets during the period. In addition to the sharp sell-off in global equity markets, the expectation of rising benchmark interest rates as well as evidence of slowing global growth including faltering energy prices dampened investor demand for Islamic credit. The Dow Jones Sukuk Index, a very broad measure of the USD denominated sukuk market, produced a total return of -32 basis points, with longer dated maturities in the 7- to 10-year bucket returning -40 basis points on average. More defensive short-duration sukuk were stable during the q
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Notes: The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.