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Market Commentary, December 31, 2018 For the week of December 31, 2018

Key Market Data

12/21/2018 12/28/2018 One Week Change YTD One Year
S&P 500 Index 2,416.62 2,485.74 +2.86% -5.21% -5.70%
MSCI EAFE Index 1,706.01 1,712.32 +0.37% -13.70% -13.39%
Barclays Capital U.S. Aggregate Bond Index 2,037.24 2,041.58 +0.21% -0.23% -0.10%
10-year Treasury Note Rate 2.792% 2.720% -7.2 basis points +31.4 basis points +28.9 basis points

Those investors who thought they knew what they were getting for Christmas – the traditionally quiet holiday week for stocks – were surprised by what turned out to be one of the wildest weeks in recent memory.

For instance, on Monday, the day before Christmas, the Dow plunged 653.17 points, taking that index, along with the S&P 500, to the brink of bear territory – where the Nasdaq had already fallen, down 20 percent from a recent high. But when the stock market reopened on Wednesday, the Dow posted its single best day ever point-wise, rising an astounding 1,086.25 points. On a percentage basis, both the Dow and S&P 500 jumped 5 percent, their best such day since March of 2009. Then, on Thursday, the Dow followed up with one of its most volatile days on record, rebounding from a steep loss early in the day to close up 260.27 points thanks to what The Wall Street Journal described as “an unexplained jolt of adrenaline.” By the end of the day on Friday, the three major indexes had finished up for the first time in three weeks but, with only one trading day left in 2018, the stock market appears poised for its worst month since 2009 and its worst yearly showing since 2008. During the week, the yield on the ten-year Treasury continued its recent retreat from 3 percent, falling to 2.720 percent.

Investors have had plenty to think about of late, notably the trade war, but last week’s volatility was at least partly attributable to President Trump’s dissatisfaction with the Federal Reserve and the government shutdown that now looks like it will almost certainly extend into 2019.

President Trump and Fed Chairman Powell

On Wednesday, Dec. 19 the Federal Reserve raised its benchmark rate for the fourth time in 2018 and Fed Chairman Jerome Powell said at his post-meeting press conference, “We think this move is appropriate for what is a very healthy economy.” After the meeting, Trump, who has been critical of the Fed and Powell, tweeted “the only problem our economy has is the Fed.” And then on Sunday, Dec. 24 after a brutal week for stocks, Treasury Secretary Steven Mnuchin tweeted that he had called the CEO’s of six of the nation’s largest banks to make sure they were liquid enough to keep lending. Though the announcement was intended to calm investors, it was widely seen as the trigger for Monday’s stock-market plummet. It also didn’t help when it was reported that Trump was looking to replace Powell, and the week began with White House spokesmen scrambling to say that was not the case and that Powell’s job was “100 percent” secure. An Oval Office meeting with the president and Powell is reportedly being scheduled, but a former Fed Chairman Alan Greenspan was worried about the political implications of such a meeting, saying, “If the conversation is a chance for the president of the United States to tell the chairman of the Federal Reserve how to run Federal Reserve policy, I’d just as soon not answer the phone.”

The shutdown – and the Democrats take over the House

As for the government shutdown, it appeared that it would be avoided until at least February after the Senate approved a stopgap spending bill with $1.3 billion for border security, but the House rejected the compromise and Trump said he wouldn’t sign a bill unless it included $5.1 billion for a border wall with Mexico. On Friday, he warned Democrats that he would close the border entirely and cut off aid to Central America unless he gets the funding he wants. Though Congress will briefly convene on Dec. 31, no progress is expected until after the New Year’s break. However, when Congress reconvenes on Thursday, Jan. 3, the Democrats will oversee the House for the first time since 2010, making a compromise more complicated. The shutdown affects nine of fifteen federal agencies and about 800,000 federal employees.

The toll on China

While the concern about a trade war with China has played a role in the stock market’s recent volatility in the United States, China has been hit even harder. With one day of trading to go, Chinese stocks have lost more than $2.3 trillion in market value this year, the worst year since Bloomberg began compiling the data in 2002. In addition, China’s benchmark Shanghai Composite Index is off almost 23 percent so far, making it the worst performing major stock index in the world during 2018.

Holiday spending surges

A number of releases were not issued last week because of the government shutdown, but there was some economic news. For example, according to Mastercard SpendingPulse, holiday retail sales for the period between Nov. 1 and Dec. 24 were up 5.1 percent from the year before, the best showing since 2012, with consumers spending more than $850 billion. The S&P CoreLogic Case-Shiller home price index increased 5.5 percent in October from a year earlier, unchanged from September’s reading. The National Association of Realtors said that its index of pending home sales fell 0.7 percent to 101.4 in November, down from a reading of 102.1 in October. Year over year, pending sales were off 7.7 percent. The Conference Board’s index of consumer confidence was 128.1 in December compared to November’s 136.4, but still near a multi-year high. And first-time jobless claims for the week ending Dec. 22 fell 1,000 to 216,000; the four-week moving average fell 4,750 to 218,000.

A look ahead

The stock and bond markets will be closed Jan. 1, and while the Labor Department will announce the jobless rate for December on Friday, Jan. 4, there won’t be any economic updates from the Commerce Department unless the government shutdown ends. This week’s scheduled releases include the latest on wholesale and retail inventories, new home sales, construction spending, vehicle sales, and the Institute for Supply Management’s manufacturing index.

Have a happy and healthy New Year.