Next week could bring the third government shutdown of 2018, especially after the fireworks out of Washington yesterday. In a widely watched live TV debate, President Trump sparred with Senate Minority Leader Schumer and House Minority Leader Pelosi regarding funding for the proposed wall on the Mexican border and potentially shutting down the government.
May to face confidence vote on Brexit. UK Prime Minister Theresa May will face a vote of confidence after the required 48 letters of “no confidence” were received from MPs following her three-stop tour across Europe yesterday. The meetings were an attempt to seek changes to her existing deal after she was forced to abandon a planned Parliamentary vote due to a lack of support. She could be replaced as early as mid-January if a simple majority of 158 Conservative MPs vote in favor. With the March 29 deadline looming for the UK to break from the EU, with or without a Brexit deal, along with Italy’s ongoing budget scuffle with EU officials and broader European economic data trending in the wrong direction, we continue to suggest avoiding or minimizing tactical exposure to the region.
Yields on two-year and three-year Treasury notes remain higher than five-year yields after both spreads turned negative last week, known as an inverting of the yield curve. However, as we discussed last week, it’s the spread between yields on longer dated Treasuries, such as the 10-year note and the two-year note, which historically has been accurate in predicting recessions. That gap remains positive, and we still see reasons to remain optimistic on the U.S. economy into 2019.
Another big reversal off the lows. The S&P 500 Index once again found support near the bottom end of its recent range, this time bouncing significantly off the intraday lows. At its low’s, the S&P 500 was down 1.9%, but managed to finish in the green. You have to go back to February 6th the last time that happened. This comes on the heels of last Thursday, when the S&P 500 bounced nearly 3% off of the intraday lows – the largest intraday reversal since February 9. Don’t forget, February 9 was also the intraday low for 2018. Bottoms are a process and we are encouraged by these reversals off of support.
Last week was a tough week for stocks, with the S&P 500 Index down 4.5%, the worst performance since March. So what are some things investors should consider? To help answer that question, here are five takeaways on the near-term outlook for stocks.
Retesting October-November lows. The S&P 500 Index fell 4.6% last week, its worst week since March, leaving the index in line with the lows of the latest correction. Losses were driven primarily by three issues: the risk that U.S.-China trade talks fall apart (see below), concerns about a Fed policy mistake, and sharply lower oil prices (see below), all of which contributed to increasing concerns about slowing global growth or recession. In today’s Weekly Market Commentary, we summarize our views on these issues and discuss prospects for a stock market rebound based on technical analysis.
Stocks Retrace Prior Week Gains
US: S&P 500 Index -4.60%, Dow -2.31%, Nasdaq -4.93%
Europe: STOXX Europe 600 -3.37%, German DAX -4.17%
France CAC 40 -3.81%, U.K. FTSE 100 -3.96%
Asia: Japan Nikkei -3.01%, China Shanghai Composite +0.68%, Korea KOSPI -1.01%
Rates/Commodities: 10-Year Treasury yield -14 basis points to 2.86%, WTI crude oil +1.50%, COMEX gold: +2.18 Continue reading
Yield curve inversions, slowing global growth, trade tensions, and more. Whatever the reason ascribed, this week’s latest sell-off in the market may have provided one of the most important ingredients to a stock market bottom: fear.
Financial markets are desperately looking for direction these days.
One issue rattling markets is the constant debate over the state of inflation. Inflationary pressures have accelerated this year, but over the past month, investors have braced for the threat of deflation. As shown in the LPL Chart of the Day, breakeven rates, or the difference between the yields of nominal Treasuries and those of Treasury Inflation-Protected Securities (TIPS), plunged last month. The 2-year breakeven rate is now sitting near a 16-month low.
Are we forming a triple bottom? Yesterday’s reversal occurred at significant support for the S&P 500 Index, marking the third time since October that stocks have tried and failed to close below 2630. This, combined with a number of elevated sentiment indicators, increases the odds of stocks moving higher in our view. Later today on the LPL Research blog, we take a closer look at whether yesterday may have been the final washout in the bottoming process.