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Market Commentary, January 7, 2019 For the week of January 7, 2019

Key Market Data

12/28/2018 01/04/2019 One Week Change YTD One Year
S&P 500 Index 2,485.74 2,531.94 +1.86% +1.03% -5.22%
MSCI EAFE Index 1,712.32 1,736.69 +1.42% +0.98% -14.08%
Barclays Capital U.S. Aggregate Bond Index 2,041.58 2,050.97 +0.46% +0.21% +0.44%
10-year Treasury Note Rate 2.720% 2.669% -5.1 basis points -1.6 basis points +21.6 basis points

New year, same story.

Stocks closed out 2018 with a run of wild swings as investors were highly reactive to news both good and bad, and 2019 began with the same volatility. Exhibit A: On Thursday, worrisome reports about Apple and manufacturing led to the Dow’s plummeting 660.02 points. Exhibit B: On Friday, an upbeat jobs report and some encouraging words from the Federal Reserve’s Chairman Jerome Powell sent the Dow soaring 746.94 points and left all three of the major indexes up for the first week of the new year. Still, with the trade war simmering and the federal government shuttered, there’s ongoing concern about the market’s direction and the state of the economy after stocks suffered through their worst year since 2008 in 2018. For the year, the Nasdaq shed 2.81 percent, the Dow 3.48 percent, and the S&P 500 4.39 percent, mainly because all three indexes suffered double-digit drops in the fourth quarter, and the worst December since 1931, after having hit record highs in the second half of 2018. As one indication of investor concern, Lipper said that investors pulled $75.5 billion from mutual funds and exchange traded funds in December, the biggest one-month outflow since the firm began tracking the data in 1992. But, overall, U.S. indexes fared better in 2018 than many foreign indexes, including Japan’s Nikkei (-10 percent), the STOXX Europe 600 (-11 percent) and the Shanghai Composite (-23 percent). At the same time, the yield on the 10 Year Treasury, which soared to a multi-year high of 3.238 percent in November, finished last week at 2.669 percent.

Thursday’s Fall

On Monday, stocks finished 2018 on a high note after President Trump tweeted that “big progress” was being made in trade talks with China – in fact, a U.S. delegation will go to Beijing this week. The market was closed on Tuesday for New Year’s, but after a quiet day on Wednesday the indexes plummeted on Thursday when Apple announced it was cutting a revenue forecast for the first time in fifteen years because of declining iPhone sales in China; Apple’s stock fell 10 percent as it lost almost $75 billion in market value. The retreat continued after the Institute of Supply Management (ISM) announced that its manufacturing index had declined from 59.3 in November to 54.1 in December, well below the forecast and the biggest month-over month drop in a decade, though any reading over 50 still indicates expansion.

Friday’s Rebound

On Friday, as noted, investors, and stocks, did a dramatic about-face. First, the Labor Department said that 312,000 jobs were added to the economy in December, well above the forecast and the best showing since February – for the year, an average of 220,000 jobs was added monthly. The unemployment rate ticked up from 3.7 percent to 3.9 percent, but that was because more Americans were looking for jobs, a sign of economic strength. In addition, wage gains were up 3.2 percent in 2018, the best annual increase since 2008. Later that day, speaking at an economic conference in Atlanta, Powell soothed investors by making it clear that, while he remained upbeat about the economy, the Fed was going to proceed with caution and that increases were not, in fact, on “autopilot” as he had earlier indicated. “We will be prepared to adjust policy quickly and flexibly,” he said, “and use all of our tools to support the economy should that be appropriate.” Investors – not to mention Trump – have been concerned about the impact of higher interest rates on the economy after the Fed raised its benchmark rate four times in 2018 to a range of 2.25 to 2.5 percent. Powell, who has been criticized by the president over the Fed’s policymaking, offered a terse “no” when asked if he would step down should Trump ask for his resignation.

The Shutdown Continues

As the stock market gyrated last week, the federal government remained closed while President Trump and the Democrats tried and failed to find common ground about the former’s demand for funding for a border wall with Mexico. The two sides couldn’t even agree on progress, with the president calling one meeting “productive” while the Democrats said it was “contentious.” Talks continued over the weekend with little progress and negotiations were complicated by the fact that the Democrats now control the House. However, even if the House passes a bill to re-open the government without full funding for a border wall, the Senate Majority Leader Mitch McConnell (R, KY), has said he won’t bring a bill to the floor that the President will veto.

China’s Slowdown

Apple’s sales slowdown in China was just one piece of evidence that the world’s second largest economy is likely feeling the impact of the trade war. In addition, China’s Caixin Manufacturing Purchasing Managers Index (PMI) fell from 50.2 in November to 49.7 in December, contraction territory. However; in a sign that consumer spending is not yet down for the count, the Caixin services PMI for December was reported at 53.9 compared to 53.8 in November. Nevertheless, at week’s end, the People’s Bank of China acted, saying it was putting $218 billion into the economy by cutting the amount of cash that banks needed to have on reserve.

In other news, despite expectations of a falloff partly attributable to rising interest rates, 17.53 million vehicles were sold in the United States in 2018, up 0.6 percent from 2017 and the fourth year in a row that sales eclipsed the 17-million mark, a record. Bloomberg’s Consumer Comfort Index climbed from 59.4 to 59.6, bringing the average for 2018 to 57.8, the highest since 2000 and up 7.8 points from 2017’s average. And first-time jobless claims for the week ending Dec. 29 rose 10,000 to 231,000; the four-week moving average was off 500 to 218,750.

A Look Ahead

This week’s list of releases is long – though it will be impacted if the shutdown continues and the Commerce Department doesn’t issue reports. Updates are scheduled to include the latest on factory orders, the ISM’s Nonmanufacturing Index, wholesale and retail inventories, new home sales, construction spending, small business optimism, the trade balance, consumer credit, job openings, wholesale inventories, and the Consumer Price Index. The Fed will also release the minutes of its last meeting of 2018, at which it raised its rate.