Market Update: Fri, Dec 21, 2018 | LPL Financial Research

LPLResearch-Macro-View

Daily Insights

Technical picture has weakened. The S&P 500 Index’s more than 5% drop through Thursday of this week has darkened the technical landscape for equities, as Wednesday’s move in the markets violated support from the February intraday lows. The next potential level of support would be the 2400 level, while on the upside stocks will have resistance at previous support levels around 2630, as well as the 200 day moving average (at 2755 currently). Yesterday’s sell-off offered mixed signals on the sentiment front, with the CBOE Composite Put/Call Ratio reaching an all-time record (data back to 1995) at over 1.9, but the TRIN Index, which looks at both the number of advancing and declining stocks as well as the volume within them, measuring just 1.09 (capitulatory readings are usually over 2.0).

U.S. government (partial) shutdown looming. Tensions over a government shutdown have increased as President Trump has pledged a partial shutdown to pressure the Senate to vote for a spending bill that includes funding a wall along the U.S.-Mexico border, one of the President’s signature campaign promises. The President’s statements come after the Senate passed a stopgap spending bill with no border-wall funding on Wednesday. If a spending bill doesn’t pass and receive President Trump’s signature, the federal government would partially shut down beginning Saturday. However, “partially” is emphasized since a majority of government operations (~95%) are already funded through September 30, 2019. A budget debate next summer, around the ceiling debt, where the U.S. credit rating could be at stake, will be a more important showdown, should it occur.

Economic data lackluster, but still positive. U.S. data reports out this morning, including durable goods orders and second revision of Q3 GDP, were below expectations. However, GDP’s 0.1% downward revision to 3.4% still illustrates that the economy continues to expand at a healthy clip. Meanwhile, durable goods orders (products intended to last 3+ years) rose in November, driven by spending on aircraft. Removing the impact of transportation-related items showed orders declining for a third straight month as machinery, electrical equipment, and motor vehicle parts orders slid. While the manufacturing sector has shown some recent weakness, it represents ~13% of the economy, some of the weakness is likely due to the 40% slide in oil prices since early October, and as GDP data shows, overall economic growth remains robust.

Stocks, bears, and recessions. With the S&P 500 down 15.8% from the September peak, the question now becomes could we see a bear market decline in the S&P 500 of 20% or more? If we do see a bear market, how low could it go? The bottom line is the worst stock corrections take place during a recession, something we don’t see happening in 2019. Looking at the 14 bear markets going back to World War II, we found the S&P 500 drops an average of 24% in a non-recessionary economy, while it has dropped 37% on average in a recession. In fact, three of the past four non-recessionary bear markets all ended right near 20% drops. This could be good news that current selloff can be fairly contained from current levels. We take a closer look at this important discussion today on the LPL Research blog.

LPLResearch-Monitoring-the-Week-Ahead

Click Here for our detailed Weekly Economic Calendar

Friday

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1946 incorporates the performance of the predecessor index, the S&P 90.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

All company names noted herein are for educational purposes only and not an indication of trading intent or a solitication of their products or services. LPL Financial doesn’t provide research on individual equities.

All performance referenced is historical and is no guarantee of future results.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Index data obtained via FactSet

Member FINRA/SIPC

For Public Use – Tracking #1-805224 (Exp. 12/19)