High volatility was the prevailing theme this week with trade uncertainty and worries about a flattening yield curve at center stage. Stocks finished lower, but bonds had their best weekly performance since May as investors fled for safety. The week started on a strong note after the U.S. and China agreed at the G20 summit to ceasefire and not to impose any additional tariffs for 90 days as they negotiate an agreement. The initial optimism later turned sour as investors realized that no substantive agreement was reached and a quick resolution is far from guaranteed. Adding to the uncertainty, news that a Chinese tech company's CFO was arrested in Canada on allegations of violating U.S. trade sanctions further complicated matters. The other key issue that unnerved investors was the U.S. Treasury curve as the 3-year rates exceeded 5-year rates, raising fears of an inverted yield curve and the belief that it's signaling a downturn ahead. While we are not dismissive of the risks, we think that such predictions are premature. A more reliable measure to monitor is short-rates (3-month) compared to 10-year rates. This yield curve is flatter, but is still positively-sloped, not inverted. Finally, the action-packed week ended with an OPEC agreement to cut oil production and Novembers' job report which showed slowing job gains, but strong enough to maintain record low unemployment rate without signs of an overheating economy.
In a Volatile Week, There are Two Sides to Every Market Story
When it comes to the market, there are typically two sides to every coin. At times, one side can be much shinier than the other, or one side can turn up rather consistently for stretches of time. And then there are times when both sides – the good and the bad news – compete for the market's eye with every flip.
Trade, interest rates and jobs were all front and center last week, with each issue offering two sides of the story. The outcome was wide market swings, including
Last week, four key issues were in focus:
1. The yield curve inverted…sort of.
2. Tariff truce emerges…with a deadline
3. Job growth continues…but wages hold the key
4. Stock market pullback: ongoing or opportunity?
We still think there is plenty of shine left on the positive side of the market's coin, but as we progress in the latter stages of this cycle, attention will shift between heads and tails. In other words, the path ahead for the market is not up to chance and we expect the still-positive fundamental backdrop to provide support against worrisome headlines. We don't think this is a prelude to a prolonged, severe downturn, but we haven't seen the last of these market swings.
Source: 1. Bloomberg
|Dow Jones Industrial Average||24,389||-4.5%||-1.3%|
|S&P 500 Index||2,633||-4.6%||-1.5%|
|10-yr Treasury Yield||2.85%||-0.14%||0.45%|
Source: Bloomberg, 12/07/18. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.
The Week Ahead
Major economic news includes the producer price index on Tuesday, consumer inflation on Wednesday and retail sales on Friday. An important international event to pay attention to will be the Brexit vote in UK Parliament scheduled for Tuesday.
The Weekly Market Update is published every Friday, after U.S. markets close.
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