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Weekly Market Update — March 23, 2019

  • The U.S. equity markets retreated this week after watching the S&P 500 hit a 2019 high in the middle of the week
  • The DJIA lost 1.3%, the S&P 500 declined 0.8%, NASDAQ gave back 0.6% and the smaller-cap Russell 2000 got walloped with a loss of 3.1%
  • The week saw more sector volatility versus what has been present most of the year, with the Financials sector dropping almost 5% and Consumer Discretionary moving up 1.2%
  • A drop in longer-term rates seemed to be responsible for much of the week's decline, especially within the Financials sector as the impact on lending margins will be exacerbated
  • Conversely, lower rates pushed the Real Estate sector up
  • The Federal Reserve left interest rates unchanged, but more newsworthy was the Fed's signal that there would be no more rate hikes in 2019
  • The yield curve briefly inverted for the first time since 2007, with the 3-month and 10-year trading places, which allowed the bears to suggest that recessionary times were just around the corner
  • The 3-month yield touched 2.45% and the 10-year yield ended at 2.44%
  • The 2-year yield dropped 12 basis points to 2.32%
  • The U.S. Dollar Index increased 0.1% to 96.65
  • WTI crude increased 0.8% to $59.01/barrel

Weekly Market Performance

The Fed Signals No More 2019 Hikes

On Wednesday, the Federal Reserve decided to leave the fed funds rate unchanged at 2.25-2.50%.

While this was widely expected, the Fed also surprised some with its signal that it does not expect any rate hikes for the rest of 2019, which is different from just a few months ago this past December when they expected two 2019 rate hikes. The Fed also mentioned that it would end its balance sheet selloff by September 30th.

Investors were pleased at first as both bond and equity markets immediately rallied on the news, but then it appeared as if investors started wondering what the Fed’s announcement says about the health of the economy. More specifically, investors seemed to sense that maybe the economy wasn't as strong as perceived and that this would translate into softer corporate earnings throughout the next couple of quarters.

This reaction led to Friday's decline, which saw the markets move down by close to 2% on Friday alone, with the S&P 500 declining 1.9%, the DJIA losing 1.8% and NASDAQ declining 2.5%.

The Yield Curve Inverted

News of the Fed's decision pushed the 10-year yields to 2.44%, which is their lowest level this year by a healthy amount. But it also pushed the difference between 3-month Treasuries and 10-year Treasuries to invert on Friday, which has not happened since 2007. This caused the bears to wake up and growl that a recession was imminent, but of course no one knows for sure.

Weakness in Europe and Brexit Adds to Uncertainty

Friday's decline also seemed to be driven by economic data that presented weakness in Europe, especially in Germany.

The Purchasing Managers Index, an indicator of the manufacturing sector, trended lower, which worried economists that expansion across the Eurozone might be slowing. And then more data showed less robust numbers in Germany, which happens to be Europe’s largest economy, as it has been negatively impacted by tariff uncertainty as its economy is dominated by the auto sector.

Lastly, while Brexit has had little impact on U.S. markets, Friday's extension of the March 29th deadline did add more uncertainty – and the markets hate uncertainty.

Data, Data, Data

  • Existing home sales increased 11.8% month–over–month in February to a seasonally–adjusted annual rate of 5.51 million
  • Total sales were 1.8% lower than the same period a year ago
  • Wholesale inventories increased 1.2% in January on top of a 1.1% increase in December
  • Wholesale sales were up 0.5% following a revised 0.9% decrease in December
  • The Treasury Budget for February showed a deficit of $233.98 billion versus a deficit of $215.24 billion for the same period one year ago
  • The fiscal year–to–date deficit is $544.23 billion versus a deficit of $390.96 billion for the same period a year ago
  • The budget deficit over the last 12 months is $932.27 billion