MARKETS ENDURE WILD CHRISTMAS WEEK RIDE

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Weekly Market Update — December 29, 2018

U.S. stocks finished the last trading week of 2018 solidly up after enduring a wild ride that brought the worst Christmas Eve session in history, followed by the largest point gain in history and the largest percentage gain since 2009
Reversing three weeks of declines, the DJIA, S&P 500, and NASDAQ finished with weekly gains of 2.7%, 2.9%, and 4.0%, respectively
Developed, international markets finished the week lower as the MSCI EAFE Index dropped 1.1%
Investors did not receive much data this week, as government reported data was suspended due to the government shutdown
Treasury yields trended a little lower as it appears that the government shutdown will continue into the New Year
Pending home sales dipped slightly this month, but year–over–year are down a worrisome 7.7%
Consumer confidence declined in December despite holiday spending up significantly
Volatility was very high, as the CBOE Volatility Index – the VIX – spiked to a new 10–month high, although volumes were light as traders were mostly gone for the holidays
Much of the stock markets' wild swings were exacerbated by tax selling, including record ETF redemptions early in the week, and year–end window dressing

Weekly Market Performance

Final Week Brings Wild Swings

U.S. stocks turned in very positive numbers during the last trading week of the year on the heels of three consecutive weeks of declines. In a departure from previous years which usually saw little trading activity and smaller market movements, the final trading week was marked by high volatility and record days – a record Christmas Eve decline followed by a record point gain on the day after Christmas.

There was not much news throughout the week for investors to react to, except maybe a statement from Treasury Secretary Mnuchin that market liquidity was firm and rumors that President Trump wanted to fire Fed Chairman Jerome Powell. Thursday epitomized the spike in volatility as the DJIA was showing all red for most of the day until a final hour spike which saw the DJIA swing by 870 points in a very short amount of time.

Tax Selling & Window Dressing

Astute investors recognized that the wild market movements were exacerbated by tax selling as we close out the year. Specifically, Monday's wild selloff was made worse by record ETF redemptions. Then Wednesday's record one–day surge seemed to be propelled by investors covering their “short–sells” and a bit of old–fashioned bargain hunting. And Thursday's initial pullback and last–hour jump was more pronounced by year–end tax selling and year-end/quarter–end window dressing.

Consumer Spending is Strong

Lost amidst the market's volatility was some very good news: consumer spending leapt by 5.1% during the holiday season.

According to a press release from MasterCard:

“A robust shopping season from before Thanksgiving through Christmas has given retailers much to cheer about this year. According to MasterCard SpendingPulse™, which provides insights into overall retail spending trends across all payment types, including cash and check, holiday sales increased 5.1 percent to more than $850 billion this year – the strongest growth in the last six years. Online shopping also saw large gains of 19.1 percent compared to 2017.”

But the final results were different among categories as MasterCard SpendingPulse™ reported that:

“Total apparel had a strong season with a growth rate of 7.9 percent compared to 2017, recording the best growth rate since 2010. The category followed through on a strong momentum that started during the back–to–school season and accelerated through fall right up to Christmas.
Home improvement spending continued to surge across the U.S. with spending during the holiday season up 9.0 percent. This trend started before the holiday season and helped the sector power through to a strong finish.
Department stores finished the season with a 1.3 percent decline from 2017. This follows two years with growth below 2 percent, some of which can be attributed to store closings. However, the online sales growth for department stores indicated a more positive story, with growth of 10.2 percent.
Electronics and appliances were down 0.7 percent. The home furniture and furnishings category grew 2.3 percent.”

But Consumer Confidence Declined

Contrary to consumer spending results during the holiday season, the Conference Board announced late in the week that consumer confidence dropped sharply to 128.1 in December, down from healthy 136.4 in November.

Diving into the data further, the Conference Board reported that:

Consumers' assessment of current conditions fell
Consumers' optimism about the short–term future fell
Consumers' outlook for the labor market fell

Pending Home Sales Declined

Pending home sales dipped in November, although there were minor increases in the Northeast and West. According to the National Association of Realtors, “the Pending Home Sales Index, which is a forward–looking indicator based on contract signings, decreased 0.7 percent to 101.4 in November, down from 102.1 in October. However, year–over–year contract signings dropped 7.7 percent, making this the eleventh straight month of annual decreases.”

Sources

nar.realtor; conference-board.org; mastercard.com; cboe.com; factset.com; sec.gov; federalreserve.gov; msci.com; standardandpoors.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com