The WMA Weekly Market Wrap v.181218

December 18, 2018

Simultaneous Corrections

The Dow fell 2 percent on Friday, while the S&P 500 fell 1.9 percent and the Nasdaq dropped nearly 2.3 percent. All three are now simultaneously in correction territory — typically defined as a fall of at least 10 percent from a recent high — for the first time since March 2016. The tech-heavy Nasdaq was the sole major benchmark to emerge from last week in positive territory YTD. Smaller-cap shares performed even worse than large caps, with both the S&P MidCap 400 and the Russell 2000 hitting new 52-week lows. Within the S&P 500, utilities shares performed best, while financial shares were notably weak because of concerns over tighter lending margins due to declines in longer-term U.S. Treasury yields.

Fears of a slowdown in the global economy seemed to be a major factor weighing on sentiment last week. News that Chinese exports had slowed were partly responsible for a sharp decline as trading opened Monday morning, although stocks managed to climb back into positive territory by the end of the day. Further disappointing data from China on Friday morning seemed to contribute to another downturn, and traders also worried about negative economic signals from Germany and France.

The ongoing U.S. trade dispute with China also weighed on sentiment early last week, although some positive later developments seemed to boost markets. Over the previous weekend, the Chinese vice foreign minister summoned the U.S. and Canadian ambassadors to protest the “lawless” arrest in Vancouver of a prominent executive of Chinese telecom company Huawei the previous week, an action taken at the request of U.S. officials in response to Huawei’s alleged violation of U.S. sanctions targeting Iran. The controversy appeared to grow more tense following the detention of two Canadian citizens in China in an apparent retaliation. On Wednesday, President Trump may have defused the situation somewhat by telling Reuters that he would consider intervening in the case to help achieve a trade deal. That statement also provoked controversy because it impugns the integrity of the rule of law in the United States by suggesting that politics can override the law. Internationally, the U.S. gets much of its moral authority (and the dollar maintains its primary reserve currency status) because the American legal system is even-handed.

Evidence of more tangible progress in U.S.-China negotiations also arrived Wednesday and seemed to give markets a boost. The Wall Street Journal reported that China was again buying U.S. soybeans, having cut off purchases several months earlier in response to new U.S. tariffs, news that was confirmed by the U.S. Department of Agriculture on Thursday. The Journal also reported that Chinese officials were redrafting their “Made in China 2025” plan — a set of measures designed to assure China’s global dominance in emerging technologies that has drawn condemnation from U.S. officials — while also considering lowering tariffs on U.S. autos.

Last week’s economic data brought some encouraging news following a string of recent disappointments. Weekly jobless claims, which had edged up over the past two months, fell sharply back to near five-decade lows. November retail sales also rose at a solid pace when taking falling gas prices into account, and robust October sales were revised even higher. Longer-term U.S. Treasury yields ended last week slightly higher.

Across the pond, the pan-European STOXX 600 rose last week, but the euro lost ground against the U.S. dollar, as the European Central Bank ended its monthly bond-buying program and left its key lending rates unchanged. The bank said that it expects policy to stay at current levels at least through the summer of 2019 and affirmed that, at the end of December, it will end four years of monthly purchases of new government and corporate bonds that were intended to suppress eurozone bond yields. ECB President Mario Draghi admitted that the change comes as eurozone risks are moving to the downside because of trade tensions, geopolitical turbulence, and volatility in financial markets.

Early last week, the Centre for European Economic Research reported that German economic expectations rose more than expected, while in France, markets received a boost after President Emmanuel Macron announced plans to cut taxes and lift wages for workers in a bid to quell the “yellow vest” social unrest that has gripped the country in recent weeks. News later in the week was not as upbeat, however. The IHS Markit purchasing managers’ index showed that the German and French private sectors slowed sharply in November.

Markets in mainland China advanced last week, as signs of a potential thaw in U.S.-China trade relations were outweighed by data showing that China’s economic slowdown deepened last month. For the week, the Shanghai Composite added 0.35 percent, while the large-cap CSI 300 Index posted a gain of 1.35 percent. Chinese stocks slumped on Friday, however, after Beijing reported that industrial output and retail sales weakened more than expected in November. Industrial production slowed to its lowest point since early 2016, while retail sales fell to its lowest growth level in more than 15 years. Elsewhere in Asia, Indian stocks were volatile but also advanced while Japanese stocks traded lower after an awful GDP report was released on Monday. Japan’s economy contracted at an annualized rate of 2.5 percent in the third quarter, much worse than forecast.

Other news and notes follow:

The Federal Reserve is widely expected to boost interest rates at its regular meeting next week and continue raising them in 2019. But officials have recently signaled a more patient approach to policy in the coming year. A more dovish Fed would likely put pressure on the dollar, as higher borrowing costs make the U.S. currency more attractive to yield-seeking investors. That, in turn, would give large caps a leg up against small caps because a weaker dollar would give multinationals a boost, making U.S. exports relatively less expensive in world markets. Inflation stayed muted last month, defying economic theory that says low unemployment, rising wages and strong economic growth should push prices higher and higher. Private economists in a new survey from The Wall Street Journal dialed back their median forecast for 2019 rate rises, calling for two next year rather than the three they expected when asked last month. The consumer-price index in November rose 2.2 percent from a year earlier while core prices, which strip out volatile food and energy categories, did the same. However, almost half of U.S. chief financial officers believe a recession will strike the U.S. economy by the end of 2019, with the tight labor market and growing trade tensions driving economic jitters among corporate America.

Why we’re safer ten years after the financial crisis.

For the first time since the 1940s, Americans are reaching retirement age in worse financial shape than their parents. An estimated 10 million people older than 65 are still working — an increase of 240 percent since 1985.

The U.S. government’s shutdown of what it called a $100 million real-estate investment scam in Belize highlights a growing concern: the criminal targeting of Americans retiring abroad.

Venture capital firms that increased their proportion of female partner hires by 10 percent had 9.7 percent more profitable exits.

China is promising greater access for foreign companies, the country’s latest effort to resolve trade tensions with the U.S. Officials in Beijing are drafting a replacement for Made in China 2025, a blueprint to make the country a leader in high-tech industries. The revised plan would play down China’s bid to dominate manufacturing and be more open to foreign participation. Meanwhile, the FBI warns that Beijing is stealing American technology to develop its own economy, threatening America’s prosperity and place in the world.

British Prime Minister Theresa May beat back a leadership challenge, subduing a rebellion within her party but leaving her politically wounded and the route to Brexit muddier than ever. To recap: she’s received lukewarm support from her own party and most lawmakers from opposition parties are likely to reject her Brexit deal. Almost any version she negotiates with the EU could well be rejected by Parliament. That suggests the likelihood of two extreme outcomes: either leaving the EU without a deal, a path that could lead to serious economic dislocation, or not leaving the EU at all.

Maurice Obstfeld, chief economist of the International Monetary Fund, warned that global growth is slowing and the U.S. will likely feel the drag. “The slowdown outside the U.S., to the extent we’re seeing signs of that, seems to be more dramatic,” Mr. Obstfeld said ahead of his end-of-the-year departure from the IMF.

In tech, media, and governmentsize matters.

The Economist warns that Moore’s Law is dying. Chips are so small and so efficient that it costs insane amounts of money to keep the doubling going. Chipmakers jokingly refer to Moore’s second law, which says the cost of a chip factory doubles every four years.

Oil prices tumbled again on Monday amid doubts that OPEC and its allies can actually cut supply. As a result, breakeven rates on U.S. Treasuries, or what investors expect the rate of inflation to average over the life of the securities, dropped dramatically. The 10-year breakeven rate had been camped above 2 percent, the Federal Reserve’s inflation target, for most of the year, but on Monday it dropped to 1.86 percent. Remember, inflation expectations matter a lot to the Fed.

Ten years ago last week, fund adviser Bernard Madoff was arrested by federal agents, accused in separate SEC and FBI complaints of a multibillion-dollar fraud.

Harvard is quietly amassing California vineyards…and the water underneath. In a warming planet, few resources will be more affected than water. Even though there aren’t many ways to make financial investments in water, investors are starting to place bets.

Low-skilled jobs are getting harder to fill. The number of unfilled jobs in the U.S. grew by 1.02 million at the end of October from a year earlier. More than a third of the new openings were in two fields typically packed with entry-level positions: accommodation and food service, and retail. That suggests steady hiring and low unemployment is allowing workers of all stripes to look for higher-paying jobs in other industries.

Baby boomers are aging alone more than any generation in U.S. history, and the resulting loneliness is a looming public-health threat. About one in 11 Americans age 50 and older lacks a spouse, partner or living child, and that portion is projected to grow. It adds up to about eight million people in the U.S. without close kin, the main source of companionship in old age.

Many key commodities are on track to notch declines this yearunderlining how fears of slowing growth, global trade tensions and a persistently strong dollar have hammered prices for raw materials. The Bloomberg Commodity Index is down by more than 6 percent this year, led by a nearly 13 percent fall in oil prices. Other raw materials are also headed lower. Those slumps came as investors pulled just over $11 billion from commodity-focused funds over the past six months.

The national housing slowdown is spreading.

The good news: a majority of Americans realize they could use some help with financial planning; the bad news: a large portion of them end up putting it on the back burner because of reluctance and nervousness.

Economists think a trade war between the U.S. and China is the biggest threat to the U.S. economy in 2019. Nearly half who responded to a survey by The Wall Street Journal said a U.S. dispute with Beijing was a greater risk than macroeconomic or financial disruptions. Meanwhile, China’s downturn deepened last month. Industrial production, weighed down by automobile makers and property markets, advanced at the slowest pace since early 2016. Growth in retail sales fell to the lowest level in more than 15 years. Nominally communist China isn’t exactly like the actually communist Soviet Union. But its economy is more Soviet than you think. “And despite its capitalist trappings, the Communist Party is piloting China’s economy in a direction similar to that of the Soviet Union in its twilight,” The Economist writes.

The U.S. budget gap widened in the first two months of the fiscal year as tax collections lagged federal outlays. Customs duties during October and November rose 86 percent to $11.8 billion due to an increase in tariffs (increased consumer prices due to tariffs don’t impact this calculation). But that was hardly enough to offset the month’s $205 billion shortfall. The deficit is headed toward $1 trillion this fiscal year.“Rarely have deficits risen when the economy is booming. And never in modern U.S. history have deficits been so high outside of a war or recession (or their aftermath)…Now would be the time to act: today’s relatively strong economy offers policymakers the opportunity to reduce deficits without fear of worsening a recession or disrupting a fragile recovery,” the Committee for a Responsible Federal Budget writes. The bottom line: This is a deficit of choice.

How would the world change if everyone who wanted to move to a different country was able to do so? Gallup asked “nearly half a million adults in 152 countries” whether they wanted to move and, if so, where they’d go. Where populations would explode: New Zealand (+231%), Singapore (+225%), Iceland (+208%), UAE (+204%), Switzerland (+187%). Where they’d decline: Sierra Leone (-70%), Haiti (-63%), Liberia (-60%), Democratic Republic of the Congo (-50%), Nigeria (-46%). The population of the U.S. would rise by 46 percent to 476 million.

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