Stocks suffered another week of steep losses, pushing all the major benchmarks to their lowest levels in well over a year. The technology-heavy Nasdaq Composite Index fared worst and joined the small-cap Russell 2000 Index in bear market territory—down more than 20% from its recent highs—on Thursday. The S&P MidCap 400 Index also moved into a bear market on Friday morning. The pullback was especially dramatic in the energy sector as oil prices plunged to the lowest levels in over a year. By the end of the week, domestic crude prices were down by over a third from their mid-October peak. Other commodity producers held up much better, however, and materials stocks were among the best performers in the S&P 500 Index. Markets remained highly volatile, with the Cboe Volatility Index (VIX) reaching levels last seen in February. Trading volumes also surged late in the week, but traders noted that concerns over sparse market liquidity over the holiday season seemed to exacerbate the downturn—turning “buy the dip” into “sell the rip,” in Wall Street parlance. Concerns over monetary policy weighed heavily on sentiment through much of the week.
In advance of the Federal Reserve’s policy meeting on Wednesday, investors appeared to worry that policymakers were resolute in hiking interest rates even as the economy cooled and financial conditions appeared precarious. Indeed, the firm’s traders noted on Monday that the S&P 500 was down over the past three, six, and 12 months—a pattern of equity weakness that has accompanied just two of 76 rate increases since 1980. Markets got a brief lift on Tuesday morning after President Trump weighed in on the debate on Twitter and repeated his call for the Fed not to make a “mistake” in hiking rates. The president’s appeal went unheeded, however, and the Fed announced another quarter-point hike in the federal funds rate on Wednesday. Stocks dropped sharply after the announcement, but a bigger factor in the decline may have been the adjustment in policymakers’ expectations for rate hikes in 2019, which was less dovish than many had expected—a majority of policy committee members now expect two further hikes in the coming year instead of three. Many investors seemed to have hoped for signals of pause in rate increases in the coming year, however. Wall Street had to cope with other policy and regulatory concerns, as well.
A federal judge’s ruling over the previous weekend that the Affordable Care Act was unconstitutional sent health care stocks sharply lower at the start of the week. Trade concerns remained a headwind, as did continuing worries over Brexit. At the stock-specific level, Facebook shares plunged Wednesday following a report in The New York Times that the company had arrangements with other tech giants to provide them user data. The prospect of a partial government shutdown at midnight Friday seemed to provoke the most anxiety. Early in the week, White House officials seemed to signal that President Trump would sign a temporary spending legislation that did not include funding for a border wall, and the Senate approved such a bill on Wednesday. An early rally evaporated and stocks tumbled on Thursday, however, following news that President Trump had told Republican congressional leaders that his demand for the wall remained in place. On Friday, stocks fell further after the president promised that the shutdown would “last for a very long time” if the Senate did not pass a new bill including wall funding. Notably, the S&P 500 endured its worst week since August 2011, when Congress almost failed to approve an increase in the federal debt limit.
The week’s economic data were mixed. Housing data continued to surprise on the update, with housing starts hitting a four-month high and permits at their best level in eight months. Existing home sales were also strong. Weekly initial jobless claims rose modestly after a sharp drop the previous week but remained near historic lows. Less encouragingly, core capital goods orders (excluding the volatile aircraft segment) declined in November, suggesting a continued slowdown in business investment. In the Commerce Department’s third and final calculation, annualized growth in gross domestic product in the third quarter was revised down from 3.5% to 3.4% due to slightly weaker consumer spending than originally estimated.
Source: G&T
