What I’m Watching This Week – 14 January 2019

The Markets (as of market close January 11, 2019)

For the third straight week, stocks posted positive returns by the close of last week. Each of the indexes listed here gained at least 2.40%, with the small caps of the Russell 2000 zooming up by almost 5.0%. Energy shares had a strong week as oil prices rallied. Investors were also encouraged by rhetoric from Federal Reserve chairman Jerome Powell, who advised that the economy remained on solid ground and that the Fed would be sensitive to changes in the economy when determining whether to raise interest rates.

Oil prices climbed last week, closing at $51.67 per barrel by late Friday, up from the prior week’s closing price of $48.26 per barrel. The price of gold (COMEX) increased last week, closing at $1,288.50 by last Friday evening, up from the prior week’s price of $1,286.70. The national average retail regular gasoline price was $2.237 per gallon on January 7, 2019, $0.029 lower than the prior week’s price and $0.285 less than a year ago.

Market/Index 2018 Close Prior Week As of 1/11 Weekly Change YTD Change
DJIA 23327.46 23433.16 23995.95 2.40% 2.87%
Nasdaq 6635.28 6738.86 6971.48 3.45% 5.07%
S&P 500 2506.85 2531.94 2596.26 2.54% 3.57%
Russell 2000 1348.56 1380.75 1447.38 4.83% 7.33%
Global Dow 2736.74 2772.41 2847.60 2.71% 4.05%
Fed. Funds target rate 2.25%-2.50% 2.25%-2.50% 2.25%-2.50% 0 bps 0 bps
10-year Treasuries 2.68% 2.66% 2.69% 3 bps 1 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • Consumer prices fell slightly in December, dropping 0.1%, after being unchanged in November. Over the last 12 months ended in December, the index has increased 1.9% — the first time the 12-month change has been under 2.0% since August 2017. Driving the December decrease was a 7.5% decline in the gasoline index. The index less food and energy increased 0.2% in December, the same increase as in October and November. Over the last 12 months, prices excluding food and energy have risen 2.2%.
  • Though a bit dated, the latest figures from the Job Openings and Labor Turnover Summary revealed that the number of job openings fell to 6.9 million on the last business day of November. There were 7.1 million job openings in October. The number of hires fell from 5.9 million in October to 5.7 million in November. Total separations also fell from 5.6 million in October to 5.5 million in November. Over the 12 months ended in November, hires totaled 68.0 million and separations totaled 65.6 million, yielding a net employment gain of 2.4 million.
  • According to the December 2018 Non-Manufacturing ISM® Report On Business®, the services sector slowed last month. The non-manufacturing index dropped 3.1 percentage points lower in December from November. Business activity fell 5.3 percentage points, employment receded 2.1 percentage points, and prices plummeted 6.7 percentage points. New orders posted a marginal 0.2 percentage point uptick in December, while exports jumped 2.0 percentage points. Respondents remained concerned about tariffs and available employment resources.
  • For the week ended January 5, 2019, there were 216,000 new claims for unemployment insurance, a decrease of 17,000 from the previous week’s level, which was revised up by 2,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended December 29, 2018. The advance number of those receiving unemployment insurance benefits during the week ended December 29 was 1,722,000, a decrease of 28,000 from the prior week’s level, which was revised up by 10,000.

Eye on the Week Ahead

More reports relating to consumer prices and inflation are on tap for this week. The Federal Reserve’s report on industrial production and capacity utilization for December will be worth examining, particularly following purchasing managers’ indication last week that manufacturing is slowing.

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What I’m Watching This Week – 7 January 2019

The Markets (as of market close January 4, 2019)

Stocks posted solid gains by the close of the first week of the new year. A favorable jobs report helped push the benchmark indexes listed here higher last Friday, as stocks recovered from an ominous start at the beginning of the week. Helping ease investors’ fears of a slowing economy, Fed Chair Jerome Powell indicated economic data is pointing to a good start to the economy in 2019, but, more importantly, the Federal Reserve is amenable to making adjustments if necessary. The small caps of the Russell 2000 led the way last week, followed by the Nasdaq and the Global Dow. The large caps of the S&P 500 and the Dow also advanced by more than 1.50%.

Oil prices advanced slightly last week, closing at $48.26 per barrel by late Friday, up from the prior week’s closing price of $45.07 per barrel. The price of gold (COMEX) increased last week, closing at $1,286.70 by last Friday evening, up from the prior week’s price of $1,283.10. The national average retail regular gasoline price was $2.266 per gallon on December 31, 2018, $0.055 lower than the prior week’s price and $0.254 less than a year ago.

Market/Index 2018 Close Prior Week As of 1/4 Weekly Change YTD Change
DJIA 23327.46 23062.40 23433.16 1.61% 0.45%
Nasdaq 6635.28 6584.52 6738.86 2.34% 1.56%
S&P 500 2506.85 2485.74 2531.94 1.86% 1.00%
Russell 2000 1348.56 1337.92 1380.75 3.20% 2.39%
Global Dow 2736.74 2718.19 2772.41 1.99% 1.30%
Fed. Funds target rate 2.25%-2.50% 2.25%-2.50% 2.25%-2.50% 0 bps 0 bps
10-year Treasuries 2.68% 2.71% 2.66% -5 bps -2 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • Note: Due to the government shutdown, some economic reports are unavailable. If and when information is released, it will be included in the corresponding What I’m Watching This Week report.
  • There were 312,000 new jobs added in December, but the unemployment rate rose 0.2 percentage point to 3.9%. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and retail trade. The number of unemployed persons increased by 276,000 to 6.3 million. Comparatively, the unemployment rate was 4.1% and the number of unemployed was 6.6 million in December 2017. The labor force participation rate was 63.1%, and the employment-population ratio was 60.6% for the third consecutive month. The average workweek increased by 0.1 hour to 34.5 hours in December. Average hourly earnings rose $0.11 to $27.48. Over the year, average hourly earnings have increased by $0.84, or 3.2%.
  • Purchasing managers noted a drop-off in confidence among manufacturers in December, with the degree of optimism dipping to the lowest point since October 2016. The IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.8 in December, down from 55.3 in November. Overall, manufacturers’ optimism and production fell to their lowest respective levels in 15 months. Job creation sputtered to an 18-month low.
  • The report from the Institute for Supply Management® followed the Markit results. The December PMI® registered 54.1%, a decrease of 5.2 percentage points from the November reading of 59.3%. The New Orders Index registered 51.1%, a decrease of 11 percentage points from the November reading of 62.1%. The Production Index registered 54.3%, 6.3 percentage point decrease compared to the November reading of 60.6%. The Employment Index registered 56.2%, a decrease of 2.2 percentage points from the November reading of 58.4%.
  • For the week ended December 29, there were 231,000 new claims for unemployment insurance, an increase of 10,000 from the previous week’s level, which was revised up by 5,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended December 22. The advance number of those receiving unemployment insurance benefits during the week ended December 22 was 1,740,000, an increase of 32,000 from the prior week’s level, which was revised up by 7,000.

Eye on the Week Ahead

Can the market sustain its push upward, or was last week merely the result of investors taking advantage of lower stock prices? If the government shutdown ends, we should see many economic reports come out this week, including the latest releases on international trade, the federal budget deficit, and the Consumer Price Index.

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What I’m Watching This Week – Annual Market Review 2018

Overview

Trade wars, midterm elections, and market volatility highlighted 2018 for investors. In an attempt to reduce the trade deficit, President Trump pushed to rewrite trade agreements with several long-time trade partners of the United States. Trump amended the trade agreement with South Korea, imposed tariffs on steel and aluminum, and renegotiated the North American Free Trade Agreement (now called the United States-Mexico-Canada Agreement). But the trade war with China has been the most compelling and impactful, not only to the countries directly involved but to much of the global economy. Reciprocal tariffs were imposed by each economic giant throughout the year. There was a temporary truce achieved following the Group of 20 summit, but there was no definitive agreement reached.

Elections in November showed how politically divided the nation is. Democrats picked up 40 congressional seats to win control of the House of Representatives for the first time since 2011. On the other hand, Republicans maintained control of the Senate. The end result is a Congress that has become more divided, at least politically. Oh, and the federal government shut down in late December due to a budgetary stalemate between President Trump and Congress, principally over funding for a border wall.

For the year, the stock market reached new highs and gave it all back by the end of December. “Volatility” is the word that best describes the market in 2018. Despite the economy expanding at a rate not seen in many years, favorable corporate earnings reports, strong consumer spending, tepid inflation, and plenty of jobs to be had, stocks floundered. Trade wars continued, the Federal Reserve hiked interest rates, oil prices bottomed out, and long-term bond prices rose. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which provides a measure of market risk and investors’ sentiments, spiked in February, then was relatively stable through much of the summer. However, by the end of December, the VIX jumped again. Stocks were sold, bought, and sold again in rapid order, causing benchmark indexes to post noteworthy gains and losses on an almost daily basis. As a result, investors rode a roller coaster of stock prices throughout the year.

The year saw some positive highlights as well. The economy expanded at an annual rate exceeding 3.0% for the first time in several years. The unemployment rate hit the lowest mark since 1969. In November, 1.7 million persons were marginally attached to the labor force, an increase of 197,000 from a year earlier. The Federal Reserve, based on the strength of the economy and labor market, raised interest rates four times during the year. Consumer income rose and purchases increased, and inflation exceeded 2.0% midyear, only to fall back below that target by the end of 2018.

Market/Index 2017 Close As of 9/28 2018 Close Month Change Q4 Change 2018 Change
DJIA 24719.22 26458.31 23327.46 -8.66% -11.83% -5.63%
Nasdaq 6903.39 8046.35 6635.28 -9.48% -17.54% -3.88%
S&P 500 2673.61 2913.98 2506.85 -9.18% -13.97% -6.24%
Russell 2000 1535.51 1696.57 1348.56 -12.05% -20.51% -12.18%
Global Dow 3085.41 3121.54 2736.74 -6.81% -12.33% -11.30%
Fed. Funds 1.25%-1.50% 2.00%-2.25% 2.25%-2.50% 25 bps 25 bps 100 bps
10-year Treasuries 2.41% 3.06% 2.68 -31 bps -38 bps 27 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Snapshot 2018

The Markets

  • Equities: The year 2018 may ultimately mark the end of what was nearly a 10-year bull run. At the start of the year, January was a good month; February and March were not. However, as spring approached, growth in equities began to pick up steam, leading to record highs in several of the benchmark indexes during the summer months. But by October, volatility began to increase, as investor concerns about the impact of a trade war between the world’s largest economies was enough to prompt sell-offs, sending stock prices lower. November was a little better, but December proved to be tumultuous. Ultimately, the benchmark indexes listed here could not match their 2017 year-end values. In fact, several of the benchmark indexes suffered their worst annual losses in many years.
  • Each of the benchmark indexes listed above fell well below their respective 2017 year-end closing values. Compared to 2017, the Russell 2000, which had eclipsed its 2017 closing mark by over 13% in September, ended the year down over 12%. The Global Dow was not far behind, falling more than 11% by the end of December. The large caps of the Dow and S&P 500 ended the year down 5.6% and 6.2%, respectively. The Nasdaq, which led the way for much of the year on the strength of tech stocks, gave all of the gains back, dropping almost 4% below where it started the year.
  • Bonds: As stock prices soared during the first half of 2018 and interest rates moved incrementally higher, the demand for long-term bonds was marginal. Yields on 10-year Treasuries rose almost 30 basis points in January as bond prices fell. Long-term bond yields continued to climb, reaching 3.0% in July. However, as volatility increased for stocks, the yield on long-term bonds began to fall as demand drove prices higher. Ultimately, the yield on the benchmark 10-year Treasuries closed 2018 at 2.68%, up from the 2017 closing yield of 2.41%.
  • Oil: Oil prices began 2018 at over $60 per barrel and continued pushing higher through January, reaching almost $70 per barrel in May. Oil prices remained in the $60 range for most of the fall, spiking to almost $76 in early October. But fears of overproduction began pushing oil prices lower in November. Prices continued to fall, hitting a low of nearly $42 per barrel in mid-December. Ultimately, oil prices closed 2018 at $45.81 per barrel — their first annual loss since 2015. As oil prices rose and fell, so did prices at the pump. Retail regular gasoline prices closed the year around $2.321 per gallon on December 24, about $0.151 less than a year ago.
  • FOMC/interest rates: The Federal Open Market Committee raised interest rates four times during 2018. Each time the target range increased by 25 basis points. The first increase occurred in March, followed by a rate increase in June, an increase in September, and a final bump occurring in December. For the year, the target range has increased 100 basis points, from 1.25%-1.50% to 2.25%-2.50%. Following each rate increase, the Committee expressed the expectation that the labor market would remain strong and the economy would continue to expand while noting that private business investment had slowed. The Committee changed its stance by the end of the year and reduced its forecasts from four rate increases in 2019 to two 25-basis-point rate increases in 2019.
  • Currencies: The dollar maintained a relatively strong position throughout much of 2018. The Wall Street Journal Dollar Index, which measures the U.S. dollar against the currencies of 16 other countries, closed 2018 at $89.67, up from its 2017 year-end mark of $85.98. Another currency index, the ICE U.S. Dollar Index, which measures the dollar relative to a basket of six foreign currencies, closed 2018 about 4.5% higher — its best annual gain in several years.
  • Gold: Through the first quarter of 2018, gold hovered around $1,350 a troy ounce. Rising interest rates, favorable stock market returns, and a strong dollar helped to push gold prices lower during the summer months. However, as stock prices faltered, gold prices pushed closer to their early-year values, finally closing 2018 at $1,284.70.

The Economy (through November 2018)

  • Employment: The U.S. labor market was solid throughout 2018. Employment growth averaged 209,000 new jobs per month in 2018, compared with an average monthly increase of 174,000 new jobs in 2017. The unemployment rate ended the year (as of November 2018) at 3.7% — lower than the 4.1% rate at the close of 2017. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 641,000, respectively. According to the Bureau of Labor Statistics, there were 6.0 million unemployed persons in November 2018, down from 6.6 million unemployed in November 2017. The labor force participation rate was 62.9% in 2018, up slightly from last year’s rate of 62.7%. The employment to population ratio was 60.6% (slightly better than 60.1% in 2017). In 2018, the average workweek was 34.4 hours (34.5 hours in 2017). Average hourly earnings in 2018 were $27.35, an increase of 3.0%, or $0.80, over $26.55 in 2017.
  • GDP/budget: Economic growth, as measured by the gross domestic product, expanded throughout the year, increasing at an annual rate of 3.4% in the third quarter of 2018. The first-quarter GDP rose 2.2%, followed by a 4.2% gain in the second quarter. Gross domestic product essentially measures what the economy produces, such as goods and services. On the other hand, gross domestic income measures all income earned from the production of goods and services, such as wages, profits, and taxes. GDI rose 4.3% in the third quarter of 2018, compared to a 1.3% increase in the third quarter of 2017. The average of gross domestic product and gross domestic income, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 3.8% in the third quarter, compared with an average annual increase of 1.9% in 2017. The federal deficit was roughly $779 billion for fiscal year 2018, an increase of $113 billion over the 2017 fiscal year deficit of $666 billion. The government fiscal year runs from October through September.
  • Inflation/consumer spending: Inflation, as it relates to consumers, had reached the Federal Reserve’s stated target rate of 2.0%, only to fall below that level in November. The personal consumption expenditures (PCE) price index, the measure of the increase in the prices of goods and services purchased by consumers, was 1.8% higher in November 2018 compared to November 2017. Core PCE, which excludes the volatile food and energy components, expanded at an annual rate of 1.9% in 2018. Personal (pre-tax) income increased 4.1% in the third quarter of 2018 compared to an annual rate of 4.4% in 2017. After-tax income (disposable personal income) increased 4.0% in the third quarter of 2018 after expanding at an annual rate of 4.4% in 2017. Another measure of inflation, the Consumer Price Index, measures the price level of a basket of consumer goods and services purchased by individuals. Over the 12 months ended November 2018, the CPI rose 2.2% (2.1% in 2017).
  • Housing: A lack of inventory, coupled with rising mortgage interest rates, contributed to a rather lackluster performance in the housing sector. Through November, existing home sales are down 7.0% from a year ago. The November annual sales rate of 5.32 million was notably lower than the 5.72 million rate for November 2017. The median existing-home price for all housing types in November was $257,700, up 4.2% from November 2017 ($247,200). November’s price increase marks the 81st consecutive month of year-over-year gains. Total inventory of existing homes for sale in November was 1.74 million — 4.2% greater than last November (1.67 million).
  • Manufacturing: Manufacturing and industrial production performed better in 2018 than the prior year. The Federal Reserve’s index of industrial production revealed that total industrial production rose 3.9% over the 12 months ended in November 2018. Over the same period, the output of consumer goods increased 1.5% and production of business equipment expanded 4.1%. Capacity utilization for manufacturing increased 2.0% over the past year. New orders for manufactured durable goods (expected to last at least three years) increased by 8.4% from 2017. Shipments were up 7.2%. Capital goods — tangible assets used by manufacturers to produce consumer goods — also expanded in 2018. New orders for capital goods increased by 8.5%, and shipments of capital goods expanded by 7.3%.
  • Imports and exports: From January through October, the international trade deficit for goods and services was $503 billion, or 11.5% greater than the deficit over the same period in 2017. The goods deficit totaled $729 billion, while services had a surplus of $226 billion. Exports increased from $1.944 billion in 2017 to $2.093 billion. Imports increased from $2.400 billion to $2.600 billion. Import prices increased 0.7% over the past 12 months ended in November. Export prices expanded by 1.8% over the 12 months ended November 2018.
  • International markets: International equities did not enjoy the same upward momentum in 2018 compared to the prior year. Economic expansion stalled for many international economies as heightened trade tensions between the United States and several of its trade partners and tighter monetary policies cast a shadow over economic expansion. Following demands for more favorable trade terms, the United States imposed tariffs on imports from several of its trade partners. While negotiations ultimately resolved trade wars with some countries, notably Mexico and Canada, a major impasse still exists between the United States and China. The impact on both countries has been palpable, particularly in China, where fixed-asset investment, retail sales, and industrial output have each decreased in 2018 compared to 2017. In Europe, Great Britain is scheduled to leave the European Union soon, yet it remains unclear under what terms Brexit will take place. Also, several countries tightened their respective monetary policies in 2018 on the heels of economic growth in 2017. The lower interest rates in 2017 that helped propel consumer spending and business investment began to rise in 2018, hindering equity and economic expansion.

Eye on the Year Ahead

The economy grew at a respectable rate in 2018. Will it continue along the same path in 2019? Fears of an economic slowdown lingered at the end of last year and may be realized in 2019. The housing market hasn’t picked up the pace and is generally lagging behind other economic mainstreams. Also, with inflation inching ahead, economic stimulus may be easing, which could lead to tighter financial conditions moving ahead. Certainly, if the global trade wars between the United States and China continue, not only will the impact be felt domestically, but a rift between the world’s two largest economies is sure to affect global economies and markets as well. And, as 2018 closes and 2019 begins, the federal government remains shut down.

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