Market Update - December 17, 2018

For the week ended December 14, U.S. stocks lost ground with several indices again reaching the 10% correction threshold from their highs earlier in the year, and small- and mid-cap stocks hitting 52-week lows.  Fears of a broader economic slowdown and slowing earnings growth, slower Chinese export numbers, lackluster data in Europe and prospects for a Government shutdown seemed be the catalysts pushing sentiment lower last week.  Hopes continued to vacillate around the possibility of a U.S.-China trade deal again, with remarks from the U.S. administration pointing to a possible resolution of the recent Huawei CFO arrest in Canada if it is tied to a potential trade deal.  From a sector standpoint in the U.S., defensive sectors such as utilities and technology saw modest gains for the week, while sectors such as energy and financials were the laggards.

Foreign stocks were mixed, with modest positivity in the U.K. after Prime Minister May survived her party’s no-confidence vote, and European markets rose along with the ECB ending its fiscal stimulus program last week, with the implication being that the economy is strong enough to stand on its own two feet without such stimulus.  However, with the U.S. dollar rising nearly a percent for the week, local currency gains turned into dollar denominated losses.  However, on the positive side, Italy has made notable progress in getting their budget for next year down to around a potential 2% deficit, compared to the 2.5-3.0% originally put forth in draft format.  Financial conditions in Japan have continued to show weakness, with Q3 GDP falling at a 2.5% annualized rate, while minimal news emanated from emerging markets with Indian markets notably gaining ground.

U.S. bonds were mixed, with government bonds flat to slightly down as treasury rates ticked higher across the middle of the yield curve, while corporate credit recovered with spreads again tightening.  Overall, long bonds continued to have the worst returns year-to-date, down several percent, while intermediate-term bonds have suffered far less and floating rate bank loans have come in as the only major U.S. bond group with positive year-to-date returns.  Foreign bonds in both developed and emerging markets fared decently in local currency terms, but, when translated into dollar terms, ended up with losses.

Commodities broadly declined due to strength in the dollar and a pullback in energy prices, although all other commodity sub groups lost ground as well, albeit to a lesser degree.  In a fairly range-bound week, crude oil fell 2% on net to end the week at just over $51/barrel, while natural gas prices gave up ground.