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.
We continue to see the U.S-China trade dispute as the biggest headwind for stocks. Against that backdrop, it is understandable that stocks threw a tantrum last week after U.S. trade officials walked back part of the apparently overly-optimistic recount of the Trump-Xi meeting at the G-20 summit. While no resolution has been reached, we continue to view the emergence of a path toward progress favorably and expect an agreement in the coming months, despite mixed messages from both sides and the arrest of a Chinese telecom executive. In this week’s Weekly Economic Commentary, due out later today, we provide some insight regarding the outcome of the G-20 meeting and what we expect over the next ~90 days as the two sides re-instate negotiations.
Leading indicators still pointing positive. Risk of a full-blown trade war with China and some potentially concerning market signals have increased fears of recession. One such signal is the inversion of the short end of the yield curve, including the spread between 2- and -5 year Treasuries. But the yield curves that have historically been more predictive of future recessions (2-year and 10-year, and 3-month and 10-year Treasuries) have not inverted. And even when they potentially do, stocks can continue to go higher for a year or two based on history. When we look at signals from the bond market alongside our other favorite leading indicators, we still see low odds of recession in the coming year.
Oil has a supply problem. Sharply lower WTI crude oil prices are also being cited by some as a sign of looming recession. But oil’s weakness has been driven mostly by supply issues, including Iran sanctions, record levels of U.S. production, and elevated domestic inventories. We think OPEC’s decision to cut 1.2 million barrels of production last week is a positive step and will help stabilize prices.
Brexit vote put on ice. In a last minute decision, British Prime Minister Theresa May decided to postpone tomorrow’s Brexit vote. Over the weekend, May insisted the vote would take place despite expectations that it would fall short by a large margin. We’re not convinced the vote will ever happen, but headline volatility is likely to persist as the UK approaches the March 29, 2019 deadline for leaving the European Union.
- CPI Report (MoM, Nov)
- Eurozone Industrial Production (Oct)
- Eurozone Employment Report (Q3)
- Initial Jobless Claims (Dec. 8); LP: 234K
- European Central Bank Rate Decision
- Nikkei Japan Manufacturing PMI (Preliminary, Dec)
- Japan Industrial Production (Oct)
- China Retail Sales (Nov)
- China Industrial Production (Nov)
- Retail Sales (MoM, Nov)
- Industrial Production (MoM, Nov)
- Markit US Services PMI (Preliminary, Dec)
- Markit US Manufacturing PMI (Preliminary, Dec)
- Markit Eurozone Manufacturing PMI (Preliminary, Dec)
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Index data obtained via FactSet
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