Investment Commentary – December 5, 2018

Year to Date Market Indices as of Market Close December 5, 2018
Dow 25,027 (1.25%)
S&P 2,700 (0.99%)
NASDAQ 7,158 (3.69%)
Gold $1,241 (-7.24%)
OIL $53.80 (-6.69)
Barclay Bond Aggregate (-1.30%)
Fed Funds Rate 2.25% (last increase was 9/26/18)

Dow futures show 100-point bounce after 800-point plunge

Regular trading on Wall Street is closed in observance of a day of mourning for George H.W. Bush but stock-index electronic trading remains open.

U.S. stock-index futures were showing modest gains early Wednesday, following ugly losses of at least 3% for the three main indexes in the previous session. Although, the market is closed as the nation mourns former President George H.W. Bush, who died Friday at 94, electronic trading of stock-index futures is still taking place.

On Monday, the yield on five-year government debt slid below the yield on three-year debt, a phenomenon which has preceded previous recessions, and is a sign that investors are more confident about current than future economic growth as the Federal Reserve raises rates is still taking place.

How did the benchmarks fare?

Futures for the Dow Jones Industrial Average YMZ8, +0.44% were up 114 points, or 0.5%, at 25,160, those for the S&P 500 index ESZ8, +0.60% were up 16.30 points to reach 2,718, a gain of 0.6%, while the Nasdaq-100 NQZ8, +0.66% climbed 45 points, or 0.7%, at 6,848.25.

On Tuesday, the Dow DJIA, -3.10% sank 799.36 points, or 3.1%, to 25,027.07, while the S&P 500 index SPX, -3.24% dropped 90.31 points, or 3.2%, to 2,700.06. The Nasdaq Composite Index COMP, -3.80% tumbled 283.09 points, or 3.8%, to 7,158.43.

The financial and industrial sectors were the biggest losers while utilities were the sole gainer in the S&P 500. All three benchmarks had their worst day since Oct. 10.

Trump Sees ‘Strong Signals’ as China Swings Into Action on Trade

U.S. President Donald Trump said China is sending “very strong signals” following weekend trade discussions in Argentina, as uncertainty remains over what commitments were made between the two nations.

“Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting,” Trump said on Twitter Wednesday. “ALL subjects discussed!”

Beijing will start to quickly implement specific items where there’s consensus with the U.S. and will push forward on trade negotiations within the 90-day “timetable and road map,” the Ministry of Commerce said in a statement on Wednesday morning in China.

Hours later, Bloomberg News reported that officials have begun preparing to restart imports of U.S. soybeans and liquefied natural gas — the first sign confirming the claims of Trump and the White House that China had agreed to start buying some U.S. products “immediately.” Trump retweeted an edited excerpt of that article Wednesday.

In China, a Ministry of Foreign Affairs spokesman said that country hopes to speed up talks and is devoted to finding a solution to settle issues.

Global markets cheered the weekend accord on Monday, only to reverse course Tuesday as doubts emerged over exactly what the world’s two largest economies had agreed on. While Asian and European equities dropped Wednesday in the wake of the biggest slide in stocks on Wall Street since the mid-October downdraft, U.S. futures advanced after the statement from China echoed Trump’s optimism over bilateral trade talks.

The Ministry of Commerce statement described the meeting with the U.S. as “very successful” and said China is “confident” of implementing the results agreed upon at the talks, but didn’t provide any further details on the outcome. It was the first official confirmation from China that there’s a 90-day window for the talks.

JP Morgan Thought of the Week

Through the third quarter, the value of all U.S. goods and services increased by $829 billion on the back of fiscal stimulus, which increased both government spending and household consumption. While we expect the fourth quarter to exceed 3% year-over-year growth, recent data suggest that the growth tailwinds of 2018 may weaken next year. Looking at the year-to-date contributions to GDP, shown in this week’s chart, it is possible to highlight areas of concern. In October, new durable goods orders, a proxy for business capital investment, fell -4.4% from last month following a downward revision in September. Housing showed further signs of softening, with new home sales down 12% from a year ago. Consumer spending, however, grew at a healthy pace in October alongside rising personal incomes, a dynamic that should persist as the unemployment rate continues to decline. All of this considered, we expect growth to moderate to a more normal 2% pace next year. Moreover, the recent decline in oil prices and cooling inflation should keep bond yields contained. This, in turn, suggests a more cautious Fed in 2019. Investors should prepare for more moderate growth in the year ahead, shifting to more high-quality duration within fixed income and maintaining a slight overweight to stocks.

Around the web

Turbulent November: On the heels of stocks’ worst October result in a decade, the major indexes endured another rough ride in November but ended up slightly higher overall. The S&P 500 added around 2%, although there was a big gap of nearly 7% between the index’s peak on November 7 and its low point on November 23.

The power of words: A single sentence in a speech by the chairman of the U.S. Federal Reserve was cited as the chief catalyst that sent the major indexes soaring between 2% to 3% on Wednesday. Jerome Powell eased fears of a more aggressive pace of interest-rate increases when he said that rates are currently “just below” estimates of a neutral level—one that neither stimulates nor suppresses economic growth.

Housing softness: Rising mortgage rates appear to be weighing on the U.S. housing market. A report on Tuesday showed that housing price gains slowed for the sixth consecutive month, while a separate report on Wednesday said that sales of new homes declined 8.9% in October relative to the previous month.

Market cap supremacy: Apple’s seven-year reign as the world’s most valuable company ranked by market capitalization has ended. Microsoft took over the top spot on Tuesday when its stock rallied, boosting the equity market value of Microsoft’s shares to $816 billion, just above Apple’s $814 billion. Microsoft’s lead remained intact at the close of trading on Friday.

Upcoming Economic News:

Jobs and unemployment, U.S. Bureau of Labor Statistics, U.S. Federal Reserve

The Markets 10 years ago vs. today

DOW 8,635/25,027 (+189.83%)
S&P 500: 845/2,700 (+230%)
Nazdaq: 1,509/7,158 (+393%)
Other Notable Indices (YTD)
Russell 2000 (small caps) -2.47
EAFE International -8.96
Emerging Markets -12.45
Shiller Annuity Index 4.19

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.