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Financial Markets Commentary For the week of November 26, 2018

Key Market Data

11/16/2018 11/23/2018 One Week Change YTD One Year
S&P 500 Index 2,736.27 2,632.56 -3.79% +0.18% +3.33%
MSCI EAFE Index 1,812.84 1,792.51 -1.12% -9.79% -7.63%
Barclays Capital U.S. Aggregate Bond Index 2,006.44 2,006.99 +0.03% -1.92% -1.86%
10-year Treasury Note Rate 3.064% 3.041% -2.3 basis points +63.5 basis points +72.1 basis points

Despite a day off on Thursday for family, turkey, and football, the major indexes fell sharply last week, with the S&P 500 dropping into correction territory – a decline of 10 percent from a recent high. In addition, the Dow fell into the red for 2018, while the Nasdaq had its worst week since March, off 4.3 percent. The selloff in tech stocks and the plummeting price of oil were seen as the main reasons for the fall, and investors looked to the safety of U.S. Treasurys, with the yield on the ten-year down for the third week straight.

Oil’s plunge, continued

The price of a barrel of oil continued its recent plunge last week, with U.S. crude dropping 7.7 percent on Friday, the biggest one-day decline since mid-2015, and falling to $50.42 a barrel, its lowest level since October of 2017. Brent crude, which had seemed well on the way to $80 a barrel not so long ago, finished the week at $58.80. There were many reasons for the fall, including rising U.S. output and the unspecified sanction exemptions for buying Iranian oil issued by the White House to eight countries, but there’s also some concern that the decline presages a slowdown in global growth. The Organization of Petroleum Exporting Countries (OPEC) meets in Vienna on Dec. 6, but Russia is reportedly against any new production limits, and Saudi Arabia is trying to stay on the right side of President Trump; last week he described that country as a “steadfast partner” that has “been very responsive to my requests to keeping oil prices at reasonable levels.” Per OPEC’s current production cut plan, Saudi Arabia has been over-producing oil by about one million barrels a day, and one possibility is that it will stop doing so, thereby cutting output without violating the plan that’s already in place.

The Brexit, continued

Yesterday, leaders from the European Union and Great Britain’s Prime Minister Theresa May signed off on a 585-page treaty setting out the parameters for the Brexit, two years after Britons voted to leave the EU in a national referendum. The plan will now go before Parliament for approval in early December, but members of May’s own Conservative Party and the opposition Labour Party have spoken against it, so passage is no sure thing. If Parliament rejects the deal, the Mar. 29 deadline for the Brexit may not be met. And even if the deal is approved, it will be followed by extended negotiations on the fine-print over trade and security. Per the plan, on Mar. 30, the EU and Britain will begin a two-year “standstill” period during which EU rules will still be in force, the main sticking point for May’s opponents. Dominic Raab, who resigned as the Brexit secretary over the deal, said, “We’d effectively be bound by the same rules but without the control or voice over them.” As for revising the agreement, Jean-Claude Juncker, President of the European Commission, said, “The European Union will not change its fundamental position,” and the Dutch Prime Minister Mark Rutte noted, “This is the maximum we can all do.” On Sunday, May published a “letter to the nation,” writing that the deal “is in our national interest” and “one that works for our whole country and all of our people.”

A “good time” for a shutdown?

With the federal government scheduled to run out of money for some agencies on Dec. 8, President Trump said last week, “This would be a very good time to do a shutdown,” unless he gets money for his border wall with Mexico. He added that he didn’t think it would happen because the Democrats “would come to their senses.”

China and the trade war

The Group of 20 will meet in Buenos Aires this weekend and it’s expected that President Trump and China’s President Xi Jinping will convene on the sidelines to discuss trade. Both sides have taken a more conciliatory tone of late, but at the recent meeting in New Guinea of the Asia-Pacific Economic Cooperation (APEC) forum, which includes twenty-one Pacific Countries. APEC was unable to issue a post-summit communique for the first time since 1989 because of friction between China and the United States over the wording. The host, Prime Minister Peter O’Neill, said, “You all know who the big giants in the room were, so what can I say.”

The holiday spending season kicks off

Shoppers spent $3.7 billion online on Thanksgiving, according to Adobe Systems, and another $6.2 billion online on Black Friday, indicating that consumers are still willing to spend despite the recent stock market volatility. In addition, while the University of Michigan’s final Consumer Sentiment Index for November was 97.5, down from the preliminary reading of 98.3 earlier this month and October’s 98.6, it was still quite high from an historical standpoint.

In other news, the Conference Board’s index of leading economic indicators increased 0.1 percent in October and is up 5.9 percent from a year earlier, evidence of continued economic expansion; year over year, the index has been at or below 0 percent before each of the last seven recessions. The National Association of Homebuilder’s index of builder confidence fell from 68 to 60, its lowest level in more than two years, mainly because of concern about reduced demand due to higher mortgage rates and home prices. Even so, the index remains well above 50, which indicates positive sentiment. Home starts rose 1.5 percent to 1.23 million in October from September, though single-home starts were down 1.8 percent. Overall, starts were off 2.9 percent from a year earlier. The National Association of Realtors reported that existing home sales increased by 1.4 percent to 5.22 million in October but were down 5.1 percent from October of 2017. The advance report for orders for durable goods fell 4.4 percent in October from September, the biggest monthly drop since July of 2017, as defense spending plummeted 59.3 percent. Excluding transportation, orders fell 0.1 percent, while orders for nondefense capital goods excluding aircraft were flat. And first-time jobless claims for the week ending Nov. 18 were up 3,000 to 224,000; the four-week moving average rose 2,000 to 218,500.

A look ahead

This week’s updates will include the latest on the S&P CoreLogic Case-Shiller Home Price Index, consumer confidence, new and pending home sales, the government’s second reading for third-quarter GDP, consumer spending, personal consumption expenditures, and the minutes of the Fed’s last meeting on Nov. 7 and 8.