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 But this quickly gave way to more of a pullback as lower political uncertainty was superseded by trade war concerns and worries over Europe, with Brexit taking the headlines.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.
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.