Chevron left arrow. Market Commentary

Market Commentary, December 17, 2018 For the week of December 17, 2018

Key Market Data

12/07/2018 12/14/2018 One Week Change YTD One Year
S&P 500 Index 2,633.08 2,599.95 -1.26% -0.91% -0.05%
MSCI EAFE Index 1,768.48 1,752.74 -0.89% -11.76% -10.18%
Barclays Capital U.S. Aggregate Bond Index 2,026.85 2,028.05 +0.06% -0.90% -1.01%
10-year Treasury Note Rate 2.847% 2.891% +4.4 basis points +48.5 basis points +54.1 basis points

With the holiday season approaching, there was a paucity of good cheer on Wall Street last week as the stock market’s recent run of volatility continued. Investors were confronted with a very long list of year-end issues to ponder; including the fate of the Brexit, the trade war, economic woes in China and Europe, the price of oil, the Federal Reserve’s next steps, turnover at the White House, a potential government shutdown. And, as of Friday, what promises to be a renewed political debate over the Affordable Care Act, which was declared unconstitutional by a judge in Texas—adding to the tensions that will preoccupy a divided Congress when it convenes in January. Stocks were further hurt on Friday when Reuters revealed that Johnson & Johnson had concealed information about the use of asbestos in its baby powder, sending that company’s stock down 10 percent as the healthcare sector tumbled along with it. As a result, the Nasdaq fell 2.3 percent on Friday, the Dow was off 2 percent, and the S&P 500 dropped 1.9 percent, sending all three indexes intro correction territory – down 10 percent from a recent high.

China gives ground – and slows down

The week began on a positive note with progress being made in the trade negotiations between the White House and China after the latter said it would cut tariffs on imported cars from 40 percent to 15 percent. And they would buy more American agricultural products though no timetable was given. Negotiators also indicated China would alter its “Made in China 2025” policy to allow increased access to Chinese markets by foreign manufacturers. President Trump said he might intervene to help free the CFO of Huawei who was detained in Canada at the request of the United States if it would help the talks. Later in the week, however; the toll of the trade war on China was apparent after it was reported that retail sales advanced in November at the slowest pace in fifteen years, while industrial output was at its lowest point since mid-2016.

An Oval Office showdown

President Trump met with the Democratic leaders Nancy Pelosi (D, CA), and Chuck Schumer (D, NY) in the Oval Office on Tuesday, and the public witnessed a televised confrontation during which the president said he would be “proud” to shut down the government on December 21st unless he got $5 billion for a border wall with Mexico: “I will take the mantle,” he said. After the meeting, the Senate Majority Leader Mitch McConnell (R, KY), said, “No matter who precipitates a government shutdown, the American people don’t like it.”

The Brexit and the slowdown in the EU

It was a rough week for Britain’s Prime Minister Theresa May. On Monday, with her Brexit plan facing certain defeat in Parliament, she postponed the vote. On Wednesday, she survived a no-confidence vote, but more than one-third of her fellow party members voted to oust her, and she only retained her job by promising to step down once the Brexit plan had been implemented. She then set off to tour the Continent, hoping to persuade European Union leaders to make concessions that would help her pass the plan in Parliament, but she was rebuffed, with Donald Tusk, President of the European Council, saying, “We have to exclude any further opening of the withdrawal agreement.” As a result, May has, for now, no viable strategy for getting her plan approved before Mar. 29 when Britain is scheduled to leave the EU. Meanwhile, the Eurozone had problems of its own to contend with. The European Central Bank announced that, as expected, it was ending its four-year €2.3 trillion quantitative easing program and leaving its benchmark rate unchanged at least through next summer. But the bank also lowered its forecast for growth in 2018 to 1.9 percent from 2 percent with the ECB’s President Mario Draghi describing the “great uncertainty” of the current economic outlook. France reported that business activity declined in December for the first time in more than two years, while Germany’s purchasing-managers index hit a four-year low. And violent protests in France forced President Emmanuel Macron to make concessions to cut taxes and boost the minimum wage.

The week in good news

Despite the holiday gloom, there was positive economic news last week. For instance, retail sales rose 0.2 percent in November from October’s upwardly revised gain of 1.1 percent and were up 4.2 percent from a year earlier; sales excluding autos and gas advanced 0.5 percent from October. In addition, the government said that the average hourly compensation of private sector workers, including pay and benefits, improved 2.9 percent in the third quarter from the year before, a sign that the tighter labor market is leading to higher salaries. Furthermore, there were 7.08 million job openings at the end of October, with jobs exceeding candidates by one million once again; before March of this year, job seekers had never exceeded openings. And the Federal Reserve Bank of Atlanta forecast fourth-quarter growth at 3 percent, up from its earlier estimate of 2.4 percent. In other news, the consumer price index was unchanged in November from the month before but up 2.2. percent over the last year. Core prices, less food and energy, rose 0.2 percent from October and 2.2 percent for the year. The producer price index climbed 0.1 percent in November from the month before and was up 2.5 percent over the year; core PPI, less food and energy, rose 0.3 percent for the month and 2.7 percent year over year, the fastest rate since 2011. Industrial production increased 0.6 percent in November from October’s -0.2 percent, while manufacturing production was unchanged. The National Federation of Independent Business said its small business optimism index fell by 2.6 points in November to 104.8. And first-time jobless claims for the week ending Dec. 8 dropped 27,000 to 206,000; the four-week moving average declined 3,750 to 224,750.

A look ahead

This week’s updates will include the latest on housing starts, building permits, existing home sales, orders for durable and capital goods, personal consumption expenditures, consumer sentiment, and the government’s third reading for third-quarter growth, expected to remain unchanged at 3.5%. And the Fed will meet on Tuesday and Wednesday, its last meeting of 2018 and one at which it’s expected to raise its benchmark rate for the third time this year.

Happy holidays and Happy New Year from Northwestern Mutual – and please note that the market commentary will not be published on Dec. 24, returning on Jan. 2 of 2019.