Economic Update 12-31-2018

• In a week shortened by the Holidays and a government shutdown, affecting the release of certain economic data, consumer confidence declined sharply, housing data was mixed, while jobless claims remained strong.
• Global equity markets ended the week with gains, despite continued mixed sentiment and unseasonal volatility.  Bonds fared decently with lower rates in the U.S., and foreign debt being helped by a weaker dollar.  Commodities lost a bit of ground, with continued decreasing prices for crude oil.

In a shortened and usually quiet holiday week, U.S. stocks experienced their worst Christmas Eve in modern memory, followed by a Boxing Day (Dec. 26 for those not celebrating) recovery featuring one of the strongest one-day percentage gains (at 5%).  The turn in sentiment seemed to be due to rumors (again) of U.S.-China trade progress, strong holiday sales from credit card company data, and high levels of annual corporate stock buybacks.  This is obviously very atypical for a holiday week, when flattish net results and extremely low volume due to vacations and little interest in consumer trading activity, is the norm.  This was all following the worst week in equities since the financial crisis over a decade ago.

The chances of the government shutdown stretching into January have risen, with little progress toward resolution by the President or Congress.  However, it’s not apparent this issue has had a major impact on markets—nor the economy, unless it drags on for several weeks, at which time it could begin to pare back a few tenths of a percent from GDP.  And, in addition, which is unclear whether it made matters better or worse, was the press release from Treasury Secretary Mnuchin describing a meeting with the largest U.S. banks to confirm a lack of liquidity issues during recent market volatility.  In hindsight, investors seemed more alarmed (a la shades of 2008) than reassured.

Both large and small cap stocks gained several percent on the week, with every sector except utilities ending on a positive note.  Consumer discretionary, communication services and technology all gained over 3% on the week to lead the way, with financials just behind.

Foreign stocks also experienced a positive week, although returns in all regions lagged those of the U.S., despite the tailwind of a weaker dollar.  In USD terms, Japan outperformed Europe and the U.K., while emerging markets fared right behind Japan.  A recovery in Brazil and peripheral Asia were the primary catalysts.  Perhaps to no surprise considering the trade uncertainty, China nearly has experienced among the worst returns of any major nation in 2018—down nearly -30%.  Of course, the narrative continues to vacillate between trade spats as a temporary phenomenon, easily fairly easily outweighed by additional government stimulus, and a broader slowing indicative of the early stage growth story coming to a conclusion, and moving on to harder-to-achieve secondary tier growth, such as in services.

U.S. bonds earned minor positive returns, with rates falling across the middle of the treasury yield curve, bringing the 10-year treasury yield down to its lowest level in several quarters.  Government bonds outperformed investment-grade corporates, while high yield fell roughly in the middle, despite the recovery in equities.  A weaker dollar helped foreign bonds in both developed and emerging markets, which returned between a half-percent and full percent.

Commodities fell slightly for the week, with volatility tempered compared to recent weeks, aside from sharp double-digit declines in natural gas, which are naturally weather-related this time of year prior to winter’s most severe few months.  Oil continued to struggle with supply running higher than expected, coupled with the same fears of demand falling below expectations, ending the week at just over $45/barrel.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                               

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.