MARKETS SUFFER WORST WEEKLY LOSS OF 2018 AS THE FED DISAPPOINTS INVESTORS AND FEARS OF A SHUTDOWN LOOM

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Weekly Market Update — December 22, 2018

Stocks turned in their worst weekly loss of 2018 as NASDAQ joined the other major indices now in bear market territory – meaning off 20% from their recent peaks
The two major concerns throughout the week were fears that the Federal Reserve would raise rates too much and too fast and that there might be a partial shutdown of the government
The Fed did raise rates a quarter-percentage point and at midnight Friday, parts of the government did shutdown after Congress and the White House failed to reach a deal
International developed and emerging markets pulled back for the week, but performed better than their U.S. counterparts as the DJIA, S&P 500, NASDAQ and Russell 2000 plummeted with weekly declines of 6.9%, 7.1%, 8.4%, and 8.4%, respectively
The weekly decline was especially difficult for the energy sector as oil prices dropped to their lowest levels in over a year, as crude prices are off by over one-third since their peak in mid-October
The CBOE Volatility Index (VIX) reached levels not seen since February as volatility returned
All 11 S&P 500 sectors finished in negative territory
Equity volatility and policy uncertainty sent the yield on the benchmark 10-year Treasury note to its lowest level since late May
The gap between short term and long term rates narrowed last week, but did not invert

Weekly Market Performance

Fed Doesn't Help Investors

Throughout the week, headlines were all about the Fed's monetary policy as many worried that the Fed would raise rates too fast and too high despite a cooling economy. Even President Trump weighed in on the Fed's path when he tweeted his recommendation that the Fed not make a “mistake” in hiking rates.

The Fed ignored the president's tweets and announced another quarter-point hike in the federal funds rate on Wednesday – its fourth rate hike this year. Stocks reacted quickly on the news and dropped, but then moved even further into the red as investors parsed through the Fed's language about expectations for 2019. Equity investors were hopeful that the Fed might signal a bit of a pause throughout 2019, but the majority of the Fed’s policy members seem to expect two rate hikes next year.

Fears of Partial Government Shutdown Looms Large

Fears of a partial government shutdown at midnight Friday loomed large over the markets for the entire week. Early in the week it appeared that President Trump might sign temporary spending legislation that did not include funding for a border wall, and as such, the Senate approved a bill on Wednesday.

Then there were reports that President Trump would absolutely not sign any legislation unless it included his demand for funding a border wall – stocks dropped.

Then on Friday stocks retreated again after the President promised that the shutdown would “last for a very long time” if a new bill did not include wall funding. On Friday, at midnight, a partial government shutdown took effect.

Not All Bad News

FactSet reported that for the 2018 calendar-year, the S&P 500 showed the highest earnings growth in eight years. Specifically, FactSet reported:

“As of today (December 21), the estimated earnings growth rate for CY 2018 is 20.3%. If 20.3% is the final growth rate for the year, it will mark the highest annual earnings growth for the index since 2010 (39.6%). All 11 sectors are projected to report year–over–year growth in earnings. Nine of the 11 sectors are predicted to report double–digit earnings growth, led by the Energy, Materials, and Financials sectors.”

Lots of Data to End the Year

Personal income increased 0.2% month-over-month in November
Personal spending rose 0.4%
The PCE Price Index increased 0.1% while the core PCE Price Index, which excludes food and energy, also increased 0.1%
Durable goods orders increased 0.8% in November
Excluding transportation, orders declined 0.3%
The third estimate for Q3 GDP showed a downward revision to 3.4% from 3.5%
The University of Michigan Index of Consumer Sentiment ended at 98.3, leaving the 2018 average at 98.4, which was the best year since 2000

Sources

factset.com; sca.irs.umich.edu; sec.gov; census.gov; federalreserve.gov; msci.com; standardandpoors.com; nasdaq.com; dowjones.com; morningstar.com; edwardjones.com; bloomberg.com