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  • December 21, 2018

Week in Review

Week Ending: December 21, 2018

Recap & Commentary

Markets endured another turbulent week, with major U.S. equity indices all ending the week down -7% or more. Both the technology-heavy NASDAQ, and the Russell 2000 (small caps), ended the week in “bear” territory, having fallen by over 20% since reaching record highs in late August. For the S&P 500, it was the worst week since August 2011, when markets were roiled by Standard and Poor’s credit downgrade of the U.S. As has been the case for the past several weeks, concerns about global growth featured prominently in the selling. The Fed’s fourth rate hike of 2018, an impending government shutdown, and a nearly -12% decline in oil prices, also weighed on markets.

Ongoing concerns about global growth were exacerbated on Tuesday by FedEx, often considered a bellwether for global growth. In reporting its fiscal second-quarter earnings, the company lowered its earnings outlook citing weaker international growth, especially in Europe.

The Federal Reserve raised interest rates by 0.25% at the conclusion of its December meeting on Wednesday. While the rate hike was widely expected, market reaction was negative as investors had been hoping for a more “dovish” tone from the Fed. However, the Fed’s upbeat assessment of the economy coupled with comments by Fed Chair Jay Powell that the Fed 1) is not overly concerned with recent market volatility and 2) will maintain its current balance sheet reduction program, left markets disappointed.

While not fundamental to the markets, the possibility of a government shutdown created an additional source of uncertainty for markets to consider. A government shutdown would close ~25% of the government. The other 75% is currently funded through the end of the fiscal year in September 2019.

Economic Bullet Points

GDP—The third estimate for Q3 GDP, saw growth revised down slightly from 3.5% to 3.5%. Robust consumer spending helped drive growth.  Currently, economists expect similar growth for Q4.

Leading Indicators—The index of leading economic indicators (LEI) rose a higher-than-expected 0.2%, but only because October’s print was revised down -0.4%, from 0.1% to -0.3%. Overall, LEI figures still point to an economy on a solid footing, however, sharply lower stock prices and a rise in initial jobless claims led to softening in November’s print.

Corporate Profits—Adjusted after-tax profits rose 19.6% in Q3. Notably, taxes on corporate income, fell -33.3% from a year ago to $243.7B.

Housing data out last week reported modestly better M/M November figures but marked softness in Y/Y rates continues to speak to overall softness in the sector, especially relative to other areas of the economy.

Durable Goods Orders rose in November, but core orders (nondefense ex-aircraft) fell -0.6% in the month. The slowdown raises concerns for the CapEx outlook, as slower growth and trade tensions may start to impair US activity.

Of Note

China announced that it would provide more monetary and fiscal support in 2019 to support its economy.  Support will be provided in the form of “significant” tax cuts, along with other targeted measures.

Market Indices Week of 12/21

S&P 500                        -7.0%

Small Caps                    -8.3%

Intl. Developed             -2.3%

Intl. Emerging              -1.2%

Commodities                -3.1%

U.S. Bond Market            0.5%

10-Year Treas. Yield         2.79%

US Dollar                          -0.4%

WTI Oil ($/bl)                      $45

Gold ($/oz)                     $1,259

The Week Ahead

  • New Home Sales
  • International Trade in Goods
  • Consumer Confidence
  • Jobless Claims

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