The holiday shortened Thanksgiving week left more than a little room for ‘thanks’ as U.S. equity markets traded right back down toward the late October lows. Energy (-5%) and technology (-6%) stocks were hit hard. Oil plummeted 10.8% on heavy U.S. production, slowing global growth, and uncertain OPEC production levels pending the upcoming OPEC meetings on December 6th. Markets will be watching this week’s G-20 meetings in Argentina very closely with hopes pinned on progress with trade conflict resolution between the U.S. and China/Japan.
- Over the weekend, the U.K. and the EU reached a withdrawal and post exit agreement which now goes to the U.K. Parliament for approval. Meanwhile, the European Commission started the process for fining the Italian government for proposed budget violations. Italian government bond spreads are nearing all-time highs.
- The OECD pointed to existing tariffs, future protectionist trends, and decelerating fiscal stimulus as key drivers to slower growth projections in 2019 and 2020 to 3.5% from 2018’s 3.7% levels.
- If no agreement is reached with China at the upcoming G-20 meetings, tariffs will jump to 25% on January 1st and essentially negate all 2019 fiscal stimulus currently in place.
- USD strength, monetary tightening, and decelerating growth are strengthening the case for fewer rate hikes in 2019. Futures markets are pricing hike probabilities downward accordingly. Only the March 2019 FOMC meeting is pricing in over a 50% probability.
- While the broad equity market traded near the year to date lows, the percentage of stocks making new lows is far lower than what occurred in the October selloff. This is considered a constructive positive divergence, where you see more selective selling rather than the babies out with the bathwater.
- From 12/31/16 through the 9/20 peak, the average stock in the R1000 gained 34.4%. Since 9/20, the average stock is down approximately 12% with Tech, Industrials, and Energy hit the hardest. Of R1000 stocks since 9/20, 5% are >-30%, 20% are >-20%, and 15% are >0%.
- Short but not sweet… Apple’s decline of over 25% in less than eight weeks dissolved $284b in market cap, more than all but nine companies in the United States equity market. Oil has lost nearly 35% in just 36 trading days, one of the sharpest oil drawdowns on record.
- Total consumer credit has grown 4.3% over the past year. The consumer balance sheet is still relatively healthy and not suggestive of major de-leveraging risk. Credit contracted 5% annually from ‘09-’13 and moved relatively sideways from 2014 until more recently.
- Raising questions regarding the longer-term growth outlook, we saw the 10yr inflation B/E drop below 2% for the first time this year last week. Falling oil prices are very much the driver.
Economic Release Highlights
- The November University of Michigan Consumer sentiment of 97.5 softened slightly from last month and missed expectations. The reading is still robust from a long-term perspective and could have been expected to fall further given stock market volatility.
- In this week’s AAII survey, bearish sentiment spiked up from just under 36% to 47%, the highest level since February 2016 - an encouraging fatigue indicator on the individual investor.
- October durable goods report fell 4.4% and September was revised from 0.8% gain to a 0.1% decline due to declines in aircraft, metals, and machinery orders. This is a volatile monthly data point, but manufacturing doesn’t look to be accelerating heading into the end of 2018.
- The November U.S. Housing Market Index buckled lower to 60 (68 expected) to post its lowest reading since August 2016. Current sales, future sales, and traffic all moved lower.
- October Housing Starts of 1.228mm was lower than expected but close to consensus. Single family homes fell for a second consecutive month but multifamily spiked 10.3% higher. YoY starts are -2.9%, permits are -6.0%, existing home sales are -5.1%, and completions are -6.5%.