MARKETS LOSE PREVIOUS WEEK'S GAINS AS FEARS OF INVERTED YIELD CURVES ADD TO WORRIES

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Weekly Market Update — December 8, 2018

Increased volatility dominated the 4-day trading week as the markets erased all of last week's gains and then some as all but NASDAQ fell into negative territory for the year
NASDAQ performed worst and lost 4.9%, followed by the decline of 4.6% in the S&P 500 and the 4.5% decline in the DJIA
Large-cap developed international markets performed better as the MSCI EAFE only lost 2.8% on the week, but it's down a whopping 14.3% on the year – hardly good news for those investing overseas
Trade uncertainty with China continues to be on the minds of investors, but worries increased as the flattening yield curve began to invert, pushing bonds to their best weekly performance since May
Market pundits talked all week about the change in the U.S. Treasury yield curve as the 2-year and 3-year rates exceeded 5-year rates, feeding fears that an inverted yield curve was signaling a downturn ahead
Further, the difference between the 2-yr and 10-yr yields narrowed to its slimmest margin since 2007 as the 2-yr yield ended at 2.70% and the 10-yr closed the week at 2.85%
Only two sectors ended the week with positive gains: the Utilities sector was up 1.3% and the Real Estate sector was up 0.3%
The November Employment Situation Report on Friday showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%

Weekly Market Performance

Stocks Fall Along With Bond Yields

Equity stock markets were off sharply this week and the technology-heavy NASDAQ and small cap benchmark Russell 2000 fared the worst, with NASDAQ off almost 5% and the Russell 2000 off 5.6%. Falling longer-term Treasury bond yields really influenced the equity markets as the Financial sector was crushed because of decreasing lending margins for banks. On the other hand, Utility stocks benefited because their dividends became more attractive amidst falling Treasury yields.

The Financial sector was the worst-performing sectors on the week as it gave up 7.1%, followed by Industrials which lost 6.3%, Information Technology down 5.1% and Health Care retreating 4.6%.

Utilities on the other hand, were up 1.3% on the week and the Real Estate sector scratched out a gain of 0.3%.

Apple continued to drag down the Technology space this week as it has lost more than 20% since its last quarterly earnings report in October.

The Energy sector dropped 3.1% on the week, but it actually outperformed the broader market, mainly because of the 3.1% increase in oil prices which ended the week at $52.52/barrel.

U.S. China Trade Conflict Stays in the News

The U.S. trade conflict with China stayed in the news for investors again this week, but the news was a bit varied. After an announcement from the White House over the weekend that China agreed to increase U.S. agricultural imports and eliminate tariffs on auto imports, the U.S. countered with a statement that it would postpone the increase in the tariff rate from 10% to 25% for 90 days.

Stocks jumped early Monday on the news. Then the next day, stocks tumbled in part to a series of tweets from Trump where he wondered out loud whether a “real deal” was possible with China and then called himself “Tariff Man.”

Then tensions increased further on news that Canadian officials acted at the request of the U.S. and arrested a high-profile executive of Chinese telecom giant Huawei on suspicion of violating Iranian sanctions.

Around The World

The pan-European STOXX Europe 600 Index and the FTSE 100 Index fell more than 3% on Thursday – the worst one-day declines since the June 2016 Brexit vote
Germany’s DAX index fell more than 4% for the week and moved into bear market territory
The FTSE 100 Index lost 3% for the week
The Nikkei 225 Stock Average fell 3.0% and is down almost 5% on the year
The Shanghai Composite Index gained 0.7%

Data For the Week

November nonfarm payroll growth was a bit less than expectations, but average hourly earnings were up 0.2% month–over–month and 3.1% year–over–year
The preliminary University of Michigan Index of Consumer Sentiment for December came in at 97.5 which is in-line with the two-year average from January 2017 to December 2018
Wholesale inventories increased 0.8% in October
Total outstanding consumer credit increased by $25.4 billion in October

Sources

dol.gov; sec.gov; fsca.isr.umich.edu; federalreserve.gov; msci.com; standardandpoors.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com