Monthly Commentary

December 2018 Commentary

2018 saw global equities succumb to widespread concerns over slowing economic growth. There were few places to hide, with virtually all asset classes, at times, falling in tandem. For the year, U.S. equities (Russell 3000® Index) fell 5.2% while foreign equities (MSCI ACWI-ex U.S.® Index) lagged, declining 14.2%. U.S. bonds (Barclays U.S. Aggregate® Index) returned 0.0% as interest rates rose modestly for most of the year.


After a long absence, volatility reestablished itself with a vengeance over the course of 2018. Markets entered the year revved up on fresh U.S. fiscal stimulus and the after-glow of a broad-based, synchronized global economic expansion. However, after making a seemingly parabolic 12% advance between mid-November 2017 and late January 2018, the S&P 500® Index quickly switched gears and abruptly nosedived 10% in a mere two weeks, foreshadowing what was to come for the remainder of the year.

By spring it was becoming clear that economic growth in both Europe and China was slowing. Meanwhile, talk of tariffs and a potential trade war sparked even greater worries. Emerging markets were hit especially hard by the combination of a slowing China, a stronger U.S. dollar and a tightening in financial conditions. Moving into late fall, rising U.S. interest rates and concern over a more restrictive Federal Reserve rate hike campaign set the stage for the next round of market angst. In late September, turbulence returned and has, this time, persisted, bringing risk assets down sharply. The perception of an increasingly dysfunctional Washington hasn’t helped.

Unfortunately, for many unsuspecting (overly complacent) investors, not paying attention to the risk side of the equation has been particularly painful these past few months. On the contrary, in our last Commentary (September 2018) we cautioned that - “Financial markets are nearing another inflection point. We believe that a variety of heretofore favorable cycles are maturing and poised to normalize (revert to the mean). Price insensitive buying has intensified over the past few quarters. The risk/reward skew for most risk assets is poor. Looking forward, this backdrop is well-suited for our value-conscious, risk-aware approach. We believe we’re uniquely positioned to manage through some oncoming turbulence that could be approaching sooner than later.”

In our view, for much of the past two years, the fundamental market climate for riskier asset classes has been less than unappealing. Investors were simply not being adequately compensated for taking on incremental risk. Accordingly, we have focused our portfolios on quality. For example, targeting established companies with strong balance sheets (lower leverage) has become an increasingly key factor in determining our global equity allocations. In short, we are exercising a heightened measure of risk management across all asset classes. Meanwhile, in recognition that market participants have, to some extent, lost their full-blown appetite for risk, we are becoming increasingly intrigued by the opportunities that this may present. With the mantra of “be careful out there”, we will prepare for those opportunities as they become available. For now, we continue to see patience as a virtue.

2019 Outlook & Positioning

Lower quality bonds are now showing increasing signs of stress (credit spreads have materially widened). Accordingly, the bond market has begun to exhibit a notable “flight to quality” over these past few months. Our analyses had revealed an unsettlingly high degree of complacency in the credit markets, particularly in non-investment grade leveraged loans. Not only are leveraged loans an unattractive asset class, we believe they could end up as this cycle’s hopefully tamer version of (circa 2007-09) sub-prime mortgages. Over the past two months, leveraged loans have tumbled to new multi-year lows. We have zero exposure to this asset class; rather, we are maintaining our high conviction overweight to U.S. Treasuries.

From an international perspective, we are intentionally posturing toward countries that, in one form or another, have broader control over their own destiny. In an increasingly unsettled world, we believe a high degree of independence will prove to be invaluable. We believe that Japan, China and the U.K. fit the bill on this mark. They each have their own currency and their own central bank. They are also less dependent on trade. Conversely, due to greater “dependency” and other macro-prudential issues, we have a less constructive  view on the eurozone. We are also cautious on Australia and Canada. These two countries are both more trade dependent; additionally, both countries may soon be dealing with the unfriendly aftermath of unwinding their own housing bubbles.

Finally, from a risk management perspective, we are paying apt attention to how the U.S. economy responds to less accommodative
monetary conditions. From a historical perspective, U.S. interest rates are still very low. The notion that the U.S. could readily withstand
still higher rates has been the prevailing view of most economists. We’ve long thought otherwise. Due to elevated, if not record,
global debt levels, our view remains that interest rate sensitivity is very high. In other words, small increases in interest rates are now
disproportionately impactful in slowing economic growth. If true, it could mean that the Fed is already overly restrictive and has
possibly made a policy error in raising rates to current levels. Until remedied, this would be a hostile environment for risk assets. We
believe recent economic weakness – housing and autos – is potentially corroborating this view. Accordingly, an ongoing reduction of
portfolio risk levels is likely to remain apropos.


We are confident that our portfolios remain well-positioned for a growth-challenged global economy. We also understand and embrace
our ongoing responsibility to insightfully differentiate between attractive and less attractive asset classes as we strive to deliver superior
risk-adjusted returns. As always, we sincerely appreciate your support.

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  • Nothing contained herein is intended to be a recommendation to buy or sell any security nor is it intended to represent the performance of any Madison Fund or product. Madison Asset Management, LLC.© January 14, 2019 - All Rights Reserved.

    Additional Information:
    The S&P 500® Index is a large-cap market index which measures the performance of a representative sample of 500 leading companies in leading industries in the U.S.

    The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excluding the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

    Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. The U.S. Aggregate Index covers the USDdenominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government- Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

    The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

    Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russel® is a trademark of Russell Investment Group.

    This material is informational only and should not be taken as investment recommendation or advice of any kind whatsoever whether impartial or otherwise).

    Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the authors’ judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

  • “Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC, and Madison Investment Advisors, LLC, which also includes the Madison Scottsdale office.  Madison Funds are distributed by MFD Distributor, LLC.  Madison is registered as an investment adviser with the U.S. Securities and Exchange Commission.  MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer, and is a member firm of the Financial Industry Regulatory Authority. 

    Madison Investments shares all personnel and resources at their Madison, Wisconsin location. Statistical data is for the consolidated Madison organization. The Madison organization consists of its holding company, Madison Investment Holdings, Inc. and its affiliates: Madison Asset Management, LLC; Madison Investment Advisors, LLC; and Hansberger Growth Investors, LP. Asset information presented includes non-discretionary assets. Refer to each entity’s Disclosure Brochure for more information.