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Market Commentary, February 12, 2018 For the week of February 12, 2018

Key Market Data

02/02/2018 02/09/2018 One Week Change YTD One Year
S&P 500 Index 2,762.13 2,619.55 -5.16% -1.84% +15.77%
MSCI EAFE Index 2,123.82 1,992.31 -6.19% -2.78% +18.56%
Barclays Capital U.S. Aggregate Bond Index 2,009.11 2,007.17 -0.10% -1.92% +1.04%
10-year Treasury Note Rate 2.842% 2.852% +1.0 basis points +44.6 basis points +45.6 basis points

Despite a rebound Friday that pulled the Dow Jones Industrial Average and S&P 500 back from correction territory, American stock indexes had their worst week in two years as investors continued to grapple with the prospect of higher inflation and interest rates because of a stronger global economy.

The uncertainty about the market’s direction led to one of the most volatile weeks in years – the Dow, for instance, had an intra-day trading range of at least 1,000 points, four times in five days – and also took its toll on indexes in Europe and Asia. The drops have been precipitous. The Dow fell by more than 1,000 points twice last week, its two steepest one-day plunges by points. But neither fall figured in the Dow’s biggest drops when measured on a percentage basis. In fact, although the Dow tumbled 1,175.21 points Monday, that was a dip of 4.6 percent; by comparison, when it shed 507.99 points on “Black Monday” in 1987, that represented a 22.61 percent decline. Amidst the turmoil, Treasury Secretary Steven Mnuchin appeared before the House Financial Services Committee on Tuesday and, when asked about the stock market, he said, “I think the fundamentals are quite strong,” adding that the recent drop was “a normal market correction.”

Back in business – and willing to spend

Despite the market’s gyrations, there was some good news for Americans last week when Congress agreed to another stopgap spending measure to keep the government funded, this time through March 23. President Donald Trump signed the deal at 8:30 on Friday morning – the government had officially shut down at 12:01 a.m. – before it had any impact on federal employees. The agreement was seen as a major step forward, albeit an expensive one. The two parties agreed to suspend the Budget Control Act of 2011 until March 2019, and also agreed to $300 billion in additional spending over the next two years and $90 billion in post-hurricane disaster aid. Chuck Schumer (D-N.Y.), the senate minority leader, said the deal was “a strong signal that we can break the gridlock that has overwhelmed this body and work together for the good of the country.” Even so, members of both parties voted against it, Democrats because it didn’t address their concerns about immigrants, and Republicans because the measure is expected to push the budget deficit past the $1 trillion mark in fiscal 2018 and 2019.

Central banks, stimulus spending – and a new chairman for the Fed

The recent stock downturn has been driven in part by the fear that central banks are going to gradually withdraw the stimulus spending and low interest rates that have buttressed the global economy since the end of the Great Recession, and last week there was evidence to support that thinking. For example, while the Bank of England left its rate unchanged, its Governor Mark Carney said the recent market trauma won’t affect its plans to raise its rate and reduce stimulus, noting, “It will likely be necessary to raise interest rates somewhat earlier and to a somewhat greater extent than we had thought.” Jens Weidmann, the president of Germany’s Bundesbank, urged the European Central Bank to wind down its bond buying later this year and not be deterred by the market. And the Federal Reserve Bank (the Fed) is expected to raise its rate at least three times in 2018, possibly four. The one holdout may be Japan, where Haruhiko Kuroda is likely to be appointed to a second five-year term as the Bank of Japan’s governor. His reappointment, according to The Japan Times, “apparently underscores the government’s wish to accelerate efforts to improve economic growth and end decades of deflation.”

Speaking of the Fed, Jerome Powell was sworn in as its 16th chairman Monday, and moved to calm the markets, saying, “Through our decisions on monetary policy, we will support continued economic growth, a healthy job market, and price stability.”

U.S. crude tumbles

Stocks were also impacted last week by the declining price of oil, with American crude dropping 9.5 percent to $59.20 a barrel, its biggest weekly decline in two years, while Brent Crude fell back below $70 a barrel. The fall in the price of oil was almost entirely the result of increased American production: the U.S. Energy Information Administration said that crude output hit 10.25 million barrels a day the week before last, a new weekly record, and revised its forecast for U.S. output in 2018 up to 10.6 million barrels a day, and 11.2 million barrels in 2019.

Germany gets a government

In Germany, Angela Merkel finally brokered a coalition government that should lead to her fifth term as chancellor. Negotiations had been ongoing since September’s inconclusive election, but to gain power, Merkel had to cede control of the Finance Ministry to the Social Democrats.

The trade gap – and tariffs

The trade gap increased to -$53.1 billion in December from -$50.4 billion in November. The deficit for all of 2017 rose 12 percent to -$566 billion, its highest level since 2008, despite last year’s weaker dollar which helped boost American exports. At a time when President Trump is contemplating tariffs against China, among other trade partners, the trade gap with that country climbed 8 percent last year to a record -$375.2 billion. China, along with the European Union, Taiwan and South Korea, has filed a complaint with the World Trade Organization over the recently raised U.S. tariffs on solar panels and refrigerators, claiming that the increases were “not consistent” with international rules. In other news, the Institute for Supply Management Non-Manufacturing Index rose to 59.9 percent in January from December’s reading of 56 percent. CoreLogic said that home prices were up 6.6 percent in December from a year earlier and 0.5 percent from November. The government reported that there were 5.8 million job openings as of the last day of December compared to 5.9 million in November. Openings were up 4.9 percent year-over-year. And first-time jobless claims for the week ending Feb. 3 fell 9,000 to 221,000; the four-week moving average dropped 10,000 to 224,500, its lowest level since 1973.

A look ahead

This week’s updates will include the latest on small business optimism, the consumer and producer price indexes, retail sales, business inventories, industrial production and capacity utilization, housing starts and building permits, and consumer sentiment.