Weekly market update
The Heist Before Christmas?
The Grinch headed Santa off at the pass last week and shut down the rally. We basically gave up everything we got the week before. The Dow slipped 4.44%, the S&P 500 fell 4.55% and the NASDAQ dropped 4.90%.
Despite the good news out of trade spat with China and recent comments from FED Chair Jerome Powell that backtracked his comments in October that started the selloff, trade issues with China and Europe showing up in the headlines is still very much an issue.
We feel confident that the FED will raise rates next week, but more than likely they will start to take a wait and see approach with further increases in 2019. What this has caused is a precipitous drop in Treasury yields the further you go out in maturities. However, shorter maturities (2-year, 3-year and 5-year) have risen. This has caused a BIG concern in the markets – in fact, it came to the forefront last week. The yield curve (the spread between 2-years and 10-years) has fallen to its lowest level in many years – currently standing at just 13 basis points – and to many market gurus, they fear an inverted yield curve (when the 2-year yield is higher than the 10-year yield) is a signal of a recession looming.
We don’t believe that investors should overreact to these recent moves for a couple of reasons. First, flattening yield curves are common during rate hiking cycles. Secondly, the yield curve has been distorted by central bank asset purchases. So, even though market pundits can clammer about it, right now, the economy remains solid. It has slowed on a couple fronts (housing and the labor market), but by and large, the biggest part of the GDP (the consumer) remains strong.
Another big issue last week was Canada’s arrest of a Huawei executive, and daughter of the President of the company, is a BIG deal in China and is probably being underplayed in the U.S. news cycle. It is basically the equivalent of Tim Cook (Apple) or Mark Zuckerberg (Facebook) executive being arrested in China. There will be more on this in the news.
I wrote last week that the Bulls didn’t want to see a slowdown in jobs growth – well, the latest read on jobs growth came in at 155, 000 and October was revised down. Unemployment stands at 3.7%. The Achilles heel in the labor market story is that America is running out of workers.
Looking ahead, the markets have a lot of noise surrounding them. The FED, trade, yield curves and oil to name a few. We will be watching next week for what the FED says following their December meeting so stay tuned and we’ll keep you posted.
