The Independent Market Observer

A Look Back at the Markets in November and Ahead to December 2018

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Dec 12, 2018 3:59:47 PM

and tagged Commentary

Leave a comment

marketsBoth October and November were roller-coaster months. October took us down, and November took us further down only to bounce and finish slightly up. Now, as we move to the end of the year, we are seeing more downward movement, although there are signs that may be passing. As investors, we should probably be checking for whiplash, as this has been a wilder ride than we have seen in years.

A look back

A roller coaster of news. The market movements were driven by a similar roller coaster of news. In November, for example, we had interest rates spike to a multiyear high, on concerns about inflation and the Fed hiking rates faster. Then, rates dropped as the Fed backed off and inflation trends moderated. We also had concerns about U.S. tariffs on Chinese goods, which battered markets, subsided after the G20 summit, and then spiked again on the arrest of the CFO of Huawei (a major Chinese tech company). Two hurricanes, Florence and Michael, disrupted major parts of the country and hurt data flows, creating economic concerns. Finally, housing continued to weaken, with builder confidence tumbling.

Political concerns. We also, of course, had the midterm elections, which had been weighing on markets. There was a postelection rally. But this quickly gave way to more of a pullback as lower political uncertainty was superseded by trade war concerns and worries over Europe, with Brexit taking the headlines. Here in the U.S., political angst resurfaced as the Mueller investigation generated more indictments and headlines, raising the risk of political conflict and rattling markets anew.

All in all, it was an eventful month, and the markets reflected that. As we started December, the news flow showed no sign of subsiding, and the markets continued to bounce around.

A look ahead

So, what will we see for the balance of the year?

Sound fundamentals. The good news is that the economic fundamentals remain sound. After the hurricane-induced slowdown in retail spending, November and December saw rebounds. Consumer and business confidence remain high, and hiring has been slower but still solid. Companies continue to report strong sales and earnings, and that is expected to continue.

Political risks subsiding. On the political front, risks remain but much of the bad news appears to be out. Brexit looks likely to happen, and markets expect it to be ugly. As such, the damage has been done, at least for the U.S. With the arrest of the Huawei CFO, the trade war has been dialed up; for now, however, the 90-day pause agreed on by the two countries seems to be holding. It appears both the U.S. and China are intent on negotiating rather than making things even worse. While the Mueller investigation continues, there is no expectation of more major events for the rest of the year. In other words, most of the damage has been done, and there is a real chance things turn for the better.

With solid fundamentals and sentiment likely to turn less negative, the prospects are better than they would seem. We have seen substantial swings over the past couple of months, driven by changes in confidence much more than changes in the fundamentals, and that is true of the most recent declines as well.

A question of confidence. The question is whether confidence will bottom, or even rebound, in the rest of the year. Seasonal factors are positive—the Santa Claus rally is not a myth in most years. But with all the bad news, it remains to be seen whether investors are willing to get into the spirit of the season or whether we will see continued volatility.

Overall, with solid economic fundamentals, any further damage is likely to be limited. The bad news? A weak December will be a cautionary sign for next year.


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®