After a few near misses, the S&P 500 finally entered a correction, meaning it closed more than 10% below its previous all-time closing high. The S&P 500 had flirted with these levels three previous times, even trading into correction territory. But it had always rallied enough at the close to stay above the 10% mark.
Investors should avoid getting too excited about officially reaching correction levels. While markets did hit a new low, the difference was marginal, and the core issues remain the same. Global economic data raised concerns about growth continuing to slow, and uncertainty about trade agreements pushed markets lower.
The S&P dropped 1.2% last week. Global stocks participated in the decline as the MSCI ACWI slid 1.1%. Concerns over economic growth have helped bonds recently, and the Bloomberg BarCap Aggregate Bond Index rose 0.1%.
Economic and Policy Update
Three sets of meetings, and the announcements that follow, will likely drive markets through year-end. Continued volatility may occur due to progress, or bad news.
The first is the Federal Reserve’s December 19 meeting on interest rates. Odds of a hike, based on CME Group data, are around 75%*. Of greater interest could be the press conference and meeting minutes communicate about future hikes. We believe the Fed will raise rates but communicate that rate hikes will likely slow next year.
The second set of meetings centers on the U.S.-China trade negotiations. Because of frequent signs of progress, followed by failures, investors have become more cynical regarding announcements from either party. Even though there are signs the talks are progressing, markets are waiting to see firm signals of progress or a deal. The accompanying chart shows the pressure on China is mounting. Industrial output grew at the slowest pace it’s seen in four years as trade pressure reduced manufacturing. These negotiations have continued to fare poorly, but both sides have an incentive to reach a truce that includes the framework for a final trade deal.
The third set of meetings encompasses the negotiations around Brexit. British Prime Minister Theresa May survived a no confidence vote last week but faces a delicate set of negotiations to get both the British Parliament and European Union to approve the same deal. The final outcome for Brexit is anybody’s guess. The near-term economic interests for all parties are for a deal, but the EU doesn’t want to make it easy to leave, and British politicians will be loath to sacrifice their careers signing on to a bad deal.
For each of these issues, the market will likely react more favorably to a pretty good long-term solution compared to a short-term truce. Economies are slowing because companies can’t make strategic decisions. Long-term predictability will likely benefit economic growth even if the solutions aren’t ideal.
Key Points for the Week
- The S&P 500, including dividends, has now declined more than 10% from its previous high.
- Weak economic data out of China and other regions put pressure on the market.
- The Federal Reserve, U.S.-China trade negotiations, and Brexit discussions will likely move markets this week.
Circle K gas stations discovered a large influx of people pulling in for gas at multiple locations last week. Turns out a computer glitch set gas prices at 2 cents a gallon. The price break allowed some customers to fill up for just 30 cents. An early Christmas gift indeed.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
*This material contains forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans, or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
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