Stocks suffered another week of steep losses bringing all the major benchmarks to their lowest levels in over a year. The technology-heavy NASDAQ Composite fared the worst, joining the small-cap Russell 2000 and mid cap S&P 400 in bear market territory—down more than 20% from recent highs. U.S. indexes caught up to the weakness in the rest of the world in a particularly brutal week of trading. The Dow Jones Industrial Average plunged over 1,655 points to end the week at 22,445, a decline of almost 7%! In addition, the NASDAQ Composite nose-dived -8.4% to 6,332. By market cap, the S&P 400 mid cap index retreated -7.0%, while the large cap S&P 500 lost -7.1%. The small cap Russell 2000 cratered -8.4%.
Major international markets were also a sea of red. Canada’s TSX ended down a third consecutive week losing -4.5%. The United Kingdom’s FTSE retraced last week’s gain losing -1.8%, while France’s CAC 40 and Germany’s DAX gave up -3.3% and -2.1%, respectively. In Asia, China’s Shanghai Composite retreated -3% and Japan’s Nikkei plunged -5.7%. As grouped by Morgan Stanley Capital International, developed markets ended the week down -3.8%, while emerging markets finished down -1.8%.
In commodities, the defensive nature of precious metals were bid amid the stock market weakness. Gold rose $16.70, or 1.4%, closing at $1258.10 an ounce. Silver added 0.4% rising to $14.70 an ounce. Following a brief respite, oil continued its absolute plunge. At the beginning of October crude oil had traded over $75 per barrel. At this week’s close, West Texas Intermediate crude oil traded at $45.59, down -11% this week. Copper, viewed as a barometer of global market health due to its wide variety of industrial uses, ended the week down -3.2%.
The number of Americans seeking new unemployment benefits rose modestly last week after hitting a 3-month low. The Labor Department reported initial jobless claims rose 8,000 to 214,000. Economists had expected a rise to 218,000. The number of claims remains far below the eight-month high of 235,000 hit a few weeks ago. The four-week average of claims, smoothed to iron-out the weekly volatility, fell 2,750 to 222,000. That number remains near its lowest level since 1973.
Sales of existing homes increased a second month in November according to the National Association of Realtors. The NAR reported existing home sales ran at a seasonally-adjusted 5.32 million pace last month, easily beating the consensus forecast of a 5.17 million rate. Sales were 1.9% higher than in October, but down 7.0% from the same time last year. In the report, homes were on the market for an average of 42 days up from 36 days in October. By region, sales surged 7.2% in the Northeast and rose 5.5% in the Midwest. Sales in the South ticked up 2.3%, while the West fell 6.3%. Home prices were up 4.2% from a year ago hitting a median sales price of $257,700.
Confidence among the nation’s home builders fell to its lowest level since May of 2015 as the housing market continues to slow. The National Association of Home Builders’ monthly confidence index fell four points to 56.6 this month. In the details of the report, the index measuring current sales conditions fell 6 points to 61, while the gauge of sales expectations over the next 6 months dropped 4 points. The index of buyer traffic fell to its lowest level since March of 2016—down 2 points to 43. In its statement, the NAHB blamed rising mortgage rates and high prices for the poor report.
Spending among the nation’s consumers rose 0.4% last month, matching expectations, led by recreational goods and vehicles. Of concern, incomes rose just 0.2%, missing forecasts by 0.1%. Inflation measured by the core Personal Consumption Expenditures reading (rumored to be the Federal Reserve’s preferred inflation gauge) ticked up to a 1.9% annual rate—its highest in three months. That reading sits just below the Fed’s target of 2.0%. Overall, the data points to a strong holiday shopping season, which should translate into a solid fourth-quarter gross domestic product reading.
Orders for goods expected to last at least three years, so-called ‘durable goods’, rose less than expected in November. The Commerce Department reported orders rose 0.8% missing expectations of a 1.3% increase. In addition, orders were led by aircraft where just a few orders can strongly affect the headline number. Core business orders, which remove defense and aircraft spending, fell -0.6% and have been down three of the past four months. Notably, machinery orders fell 1.7%, its first decline since March. Electrical equipment and vehicle orders also fell. Year-over-year, core business orders are down 4.0%, their slowest pace since March of last year. That reading confirms a weaker capital expenditure trend.
Manufacturing activity in the New York region slowed considerably this month according to the latest data from the New York Federal Reserve. The New York Fed reported its Empire State manufacturing index fell 12.4 points to 10.9, its weakest level in over a year and a half. Economists had expected a reading of 21. There was weakness across the board in the report. The new orders sub-index fell 5.9 points, while the shipments sub-index declined by 7 to 21. Analysts blamed trade tensions with China and a stronger U.S. dollar for the weak report.
In Philadelphia, manufacturing activity remained subdued as the Philly Fed’s General Activity Index fell 3.5 points this month to 9.4—its lowest level since August of 2016. The reading has been down four out of the past five months, as manufacturing growth has continued to moderate. Economists had expected an increase of 2.1 points to 15.0. Below the headline number, shipments rose at their slowest pace since September of 2016. Inventories shrank and new orders and hiring picked up modestly.
Despite the wishes of President Donald Trump, the Federal Reserve raised its benchmark interest rate a quarter point to 2.25-2.50%. While there was some good news for market bulls in their announcement--the Federal Reserve now anticipates just two more rate hikes in 2019 instead of the three it had originally planned, the Fed statement reiterated that further rate hikes were expected, a statement that surprised some economists. Federal Reserve Chairman Jerome Powell stated “Policy at this point does not need to be accommodative—it can move to neutral.” In a preview of 2019 he said the Fed expects “solid growth next year, declining unemployment and a healthy economy”.
Factory activity has led Canada to its fastest economic growth in five months according to Statistics Canada. Canada’s gross domestic product grew 0.3% in October led by manufacturing, finance and insurance, and wholesale trade. The reading exceeded analysts forecasts of a 0.2% rise. Factory production rebounded 0.7% making up most of its losses over the previous two months, while wholesale trade climbed 1%. This GDP report is the last one Bank of Canada policymakers will see before setting interest rates in early January. After raising rates five times since mid-2017, Governor Stephen Poloz has said how soon he considers another rate increase will depend on fresh data and that he needs to assess the drag from a drop in Alberta oil prices.
Across the Atlantic, the Bank of England cut its growth forecast stating that uncertainty over the UK’s departure from the EU had “intensified considerably” over the past month. Amid a backdrop of weaker global growth, the bank’s Monetary Policy Committee voted unanimously to hold interest rates at 0.75%. Furthermore, the bank now expects the economy to grow by just 0.2% in the final quarter of 2018, down from an earlier forecast of 0.3%. Analysts have stated that if there is a deal reached regarding Brexit, the Bank of England will likely raise rates quickly. Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics stated, “We continue to think that the MPC won't wait for signs of a recovery to emerge in the data and will raise Bank Rate to 1.0% in May.”
French statistics agency INSEE reported French economic growth should rebound early next year after violent anti-government protests and declining business confidence cut short a previously expected year-end recovery. The eurozone’s second-largest economy is on course to grow only 0.2% in the final quarter of the year, down from 0.4% in the third. INSEE had previously forecast growth of 0.4% in the final quarter, but cut its estimate after a proposed sharp hike in fuel taxes by President Macron sparked protests. But even before the protests, business confidence had been deteriorating as global trade tensions continued to rise.
Worries continue to grow about the strength of Germany, Europe’s economic engine, after a key indicator suggested fears over trade disputes and Brexit are impacting business activity. The Ifo Institute reported its business confidence index dropped 0.9 point to 101.0 in December as managers’ views of both their current circumstances and their prospects for the next six months fell. The reading was the fourth drop in a row and the lowest reading in over two years for the index. Uncertainty over the economy is growing just as the European Central Bank announced that it will end its 2.6 billion euro ($3 billion USD) stimulus program. The ECB says the economy is strong enough to halt the stimulus but is keeping other support measures, such as record-low interest rates in place.
In a policy shift that could help China withstand short-term shocks from its trade conflict with the United States, Chinese President Xi Jinping approved a combination of measures aimed at spurring investment and consumption. They including allowing easier credit (especially to local governments) and expanding tax cuts. The plan comes as China’s economy faces headwinds from weakening household spending, declining industrial output, and slumping factory investment. The plan keeps risk control as a major task for 2019. It also promises to use tax cuts on a greater scale and significantly increase the size of bond issuance by local governments, which have long been under Beijing’s scrutiny for running up debt.
Japan’s economy is on track to equal its record postwar expansion streak with a 73rd consecutive month of growth, according to the government’s monthly economic report. If confirmed, the current recovery will officially match the record set in the period from February 2002 to February 2008. Economic and Fiscal Policy Minister Toshimitsu Motegi stated this “appears to be highly likely”. The streak has been driven by a growing global economy which has fueled brisk exports and capital spending over the last several years. The Bank of Japan’s monetary policy put downward pressure on the yen, making Japan’s exports more affordable and bolstering exporters profits. The report cited "uncertainty in overseas economies" and "fluctuations in the financial and capital markets" as risk factors. The U.S. and Japanese stock markets have seen steep downturns in recent months, and some analysts warn that world growth has passed its peak.
Finally, after stocks suffered their worst week since 2008 pretty much everyone knows that stocks are struggling as of late. But with each of the major indexes falling into bear market territory many are probably unaware of just how swiftly and severely individual stocks have been hit. Many of Wall Street’s recent favorites are down—hard, with most of the FAANG stocks down anywhere from just over 20 to near 40%! Research firm FactSet created the following graphic showing just how bad the carnage has been: