The WMA Weekly Market Wrap – 1/8/2019

January 8, 2019

Volatile with a Strong Ending

U.S. stocks bounced back from their worst two-day start to a year since 2000, soaring Friday after fresh signs of economic strength eased fears that slowing growth around the world could drag on the U.S. expansion. The Dow jumped more than 700 points as a better-than-expected December jobs report supported a healthy labor market. Stocks rose further after Fed Chairman Jerome Powell said economic data suggests good momentum heading into the new year, but the central bank is “prepared to adjust policy quickly and flexibly” if necessary.

For the week, domestic stocks rose for a second consecutive week, but remained extremely volatile. The smaller-cap benchmarks, which typically see more volatility, performed the best after suffering the biggest declines in 2018 — the worst overall year for stocks in a decade. The week’s gains left only the small-cap Russell 2000 in bear market territory, down roughly 21 percent from its recent high.

Within the S&P 500, energy shares were especially strong, supported by a rebound in oil prices. Communication services shares also outperformed, aided by both a solid rise in Netflix and gains in the shares of traditional telecommunications firms, whose dividends have become more appealing following the recent drop in bond yields. Technology stocks underperformed, hurt by a sharp drop in Apple’s stock on Thursday. Healthcare stocks also underperformed as uncertainty lingered over the future of the Affordable Care Act and the potential for legislation regulating drug prices to be introduced in the new Congress.

The week started off well, helped in part by hopeful signs in the ongoing U.S.-China trade dispute. President Trump tweeted over last weekend that he and President Xi Jinping had made “big progress” in trade talks, sending shares higher when trading opened Monday. Trading was relatively light in advance of the New Year’s holiday, however, and some weak economic data out of China might have limited the gains. Indeed, worries about China sent the indexes sharply lower when trading reopened Wednesday, although the market rallied in the afternoon and closed modestly higher.

After the market’s close on Wednesday, Apple CEO Tim Cook warned that the company was lowering its quarterly revenue guidance – the first such cut in 15 years. Apple shares tumbled nearly 10 percent on Thursday in response, dragging the large-cap indexes lower. Cook’s letter also soured sentiment broadly because he blamed slowing iPhone demand in China, which he attributed in turn to economic weakness resulting from the trade battle with the U.S. Yet some critics suggested that Apple’s strategy in China might be to blame, with Chinese consumers favoring other, more affordable (and largely Chinese) smartphones.

The week’s economic data also played a role in moving markets. Thursday’s sell-off appeared partly due to a sharp decline in the Purchasing Managers’ Index, particularly the gauge of new order activity. The decline followed recent disappointing data on durable goods orders and seemed to confirm a substantial slowdown in business investment late in 2018. Markets jumped on much better news on Friday. The Labor Department reported that employers had added 312,000 nonfarm jobs in December, while weaker showings in previous months were revised upward. Average hourly earnings also increased at an impressive rate.

Stocks got a further boost Friday from the reassurance offered by Fed Chair Powell. Taking questions at an economic conference, Powell stressed that the Fed would deepen its focus on economic conditions in 2019 and would not hesitate to respond with all the tools at its disposal to counteract an economic downturn or financial turmoil. Powell also stressed that, while the downturn in manufacturing bore watching, hard economic data remained generally sound.

Despite surging Friday in response to Powell’s comments and the payrolls report, U.S. Treasury yields ended the week lower as traders sought out safe-haven assets in the wake of continued volatility in equity markets and geopolitical uncertainty. The benchmark 10-year U.S. Treasury note ended the week yielding 2.67 percent.

After a weak start last week, the pan-European STOXX Europe 600 gained ground and was up about 2 percent for the week, buoyed by prospects of fresh U.S.-Chinese trade talks. On Thursday, however, European shares were caught in the global sell-off triggered by Apple’s sales projection downgrade, which reinforced expectations that a global economic slowdown is underway. For the week, Germany’s DAX rose about 2 percent, France’s CAC-40 was up about 1 percent, and the UK’s FTSE Index was up about 1.5 percent.

Mainland Chinese stocks advanced in the holiday-shortened week, and the country’s central bank stepped in with more targeted stimulus measures after a mixed batch of indicators pointed to a deepening economic slowdown. For the week, the Shanghai Composite and the large-cap CSI 300, China’s blue chip benchmark, each advanced 0.8 percent. After Friday’s market close, the People’s Bank of China cut the reserve requirements for Chinese banks, which will free up a net of 800 billion yuan (roughly $117 billion) for lending, the central bank said. The move marked the fifth such cut since the start of 2018 for China, which is trying to support a slowing economy that has been further weakened by U.S. tariffs. Japanese stocks dropped more than 2 percent in their holiday shortened week.

Other news and notes follow.

U.S. employers added jobs in December at the fastest pace since February and wages surged, suggesting the economy maintained strong momentum at the end of 2018 even as financial markets sank. U.S. nonfarm payrolls increased a seasonally adjusted 312,000 last month, the Labor Department reported Friday. Average hourly earnings rose a seasonally adjusted 0.4 percent from November and 3.2 percent from December 2017, the best full-year gain since 2008. The unemployment rate climbed to 3.9 percent from 3.7 percent in November, mainly due to more people entering the workforce.

On Friday, Federal Reserve Chairman Jerome Powell said the Fed is prepared to be patient given tension between signals from financial markets and the economy, perhaps signaling no imminent rate increase. “With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” he said in a speech in Atlanta. Mr. Powell also addressed speculation that President Trump’s unhappiness over monetary policy might lead to his removal as Fed chairman. He said he wouldn’t resign his post if Mr. Trump asked him to do so.

A meeting Friday between President Trump and newly powerful Democrats ended in varied descriptions of what transpired, with Republicans expressing fresh optimism a deal could be struck and their political opponents offering drearier views of a compromise. However, both sides acknowledged that the president said he’d be willing to “keep the government closed for a very long period of time – months or even years.”

A new Congress was sworn in last week. The Democrats regained control of the House and Nancy Pelosi returned to her role as Speaker. Here’s who’s who in the new House and Senate.

Fears about the global economy intensifiedwith downbeat news sending U.S. stocks falling Thursday and driving bond yields to their lowest level in almost a year.

Bitcoin slumped about 70 percent in 2018, erasing $160 billion of digital wealth as the cryptocurrency market’s shaky footing was exposed.

In the largest monthly exodus since at least 1992, investors yanked a net $75.5 billion from U.S. mutual funds and exchange-traded funds in December. But some retail investors are looking to hold on through the volatility and even take advantage of the rout.

The yield curve is sending an increasingly worrisome signal about the economy by flattening, as the gap between shorter and longer-term U.S. Treasury paper narrows.

When it comes to mutual funds and exchange-traded funds that buy U.S. stocks, those that passively track indexes now hold 48 percent of assets, according to estimates from Morningstar. They’ll top 50 percent in 2019 if the current trend holds.

In the aftermath of California’s Camp fire — 86 dead, more than 13,900 homes destroyed and the town of Paradise decimated — local and state officials said the tragedy was unforeseen and unavoidable, an “unprecedented” monster of fire. In truth, the destruction was utterly predictable, and the community’s struggles to deal with the fire were the result of lessons forgotten and warnings ignored. The miracle of the tragedy, local officials now concede, is how many people escaped.

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