Markets went for another wild ride last week, as major domestic indexes swung back and forth. By Friday, December 7, markets had posted their worst weekly performance since March—and the S&P 500 and Dow both moved into negative territory for 2018.
Let’s take a look at what is driving this challenging market performance.
Examining Recent Volatility
1. How volatile are stocks right now?
If recent market fluctuations have felt intense to you, there’s a reason: They are. The past three weeks have had the most volatility since 2008’s financial crisis. During this time, domestic indexes have ricocheted between gains and losses. The large swings have occurred both week-to-week and within daily trading.
2. What is causing the volatility?
Many of the same themes we’ve discussed throughout 2018 are continuing to affect market behavior. Ultimately, many investors are worried that corporate profits and global growth will suffer if trade tension persists and the Federal Reserve continues raising interest rates.
Concerns about Treasury yields were also on investors’ minds. For part of last week, 3-year Treasury notes had higher yields than 5-year notes. Called an inversion, a higher yield on shorter-term Treasuries can be a sign of a coming recession. The yield spread between 2-year and 10-year Treasury notes, which people focus on more, has not inverted.
3. Should you feel concerned?
With many headlines to digest, from conspiracy charges against a Chinese tech leader to comments from the Fed, investors had a lot to consider last week. The difference is how they reacted to this information. For some time, markets were basically ignoring headlines. Now, they’ve moved in the opposite direction into what one investment manager called “a period of hypersensitivity.”
Consequently, recent market performance may seem unnerving. As is often the case, however, the reality may be less extreme than what appears at first glance, especially when you look at the fundamentals.
4. What do the fundamentals tell us?
While last week’s market performance saw large fluctuations, the fundamentals we received were far less dramatic. We learned that two sectors beat expectations in November: manufacturing and service. Further, the November labor report revealed fewer new jobs than anticipated, but unemployment is still at historically low levels, as job and wage growth continue.
After another ugly week of down-side the market, as of this writing, continues to move down almost 2% today. It looks as if we could likely re-visit the February lows for the market. For the S&P500, that’s the 2,532 ( another 2% from here or just under 4% from Friday’s close).
So, does the market rally from this point? Trade sideways? Or is there more downside?
From a technical perspective, it’s difficult to call. The short-term signal is for a bounce higher from here. Markets appear over-sold, and the news driving things down appears to be more about rumors than it does about economic data. If one wrong utterance about China and trade can take the markets down 100 points on the S&P500, one has to wonder what a right utterance could do.
Longer term, the technical picture is becoming concerning. It’s a tale of two big-picture events. Does the bull market regroup and go higher, or are we in for a more significant big-picture pull back (aka bear market)? And IF it were a bear, how far does it drop from here?
The thing is, the economic data doesn’t support a giant pull-back at this time. Answer: who knows? We can all speculate. Perhaps it’s the failure of a major state pension plan. Perhaps it’s a full-blown trade war with China. Perhaps it’s a nuclear missile launch from North Korea. Whatever the black swan event, it’s not ‘known’ by the markets. So, it’s tough to call it priced in.
At this point, the markets have priced in a lot of bad news. Multiples have fallen. Many stocks are in bear market territory. In many cases, if it weren’t for the cap-weighted nature of the indexes, you’d see that many of the non-mega-cap stocks have already gone through bear-like corrections and for those who own individual stocks, you have witnessed that many stocks have gone through bear market-like corrections already.
Remember, risks exist in the markets and economy, and we’re analyzing these details closely. If you have any questions about your financial standing or anything you hear in the news, we are here to talk.
Thursday: Jobless Claims
Friday: Retail Sales, Industrial Production
This day in history:
December 10 - The first Nobel Prizes are awarded in Stockholm, Sweden, in the fields of physics, chemistry, medicine, literature, and peace. The ceremony came on the fifth anniversary of the death of Alfred Nobel, the Swedish inventor of dynamite and other high explosives. In his will, Nobel directed that the bulk of his vast fortune be placed in a fund in which the interest would be “annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind.” Although Nobel offered no public reason for his creation of the prizes, it is widely believed that he did so out of moral regret over the increasingly lethal uses of his inventions in war.
Quote of the week:
“If you wish to get rich, save what you get. A fool can earn money; but it takes a wise man to save and dispose of it to his own advantage.”
― Brigham Young
PUBLISHED BY NICK TOADVINE