It was a perfect storm this week for the markets. Traders threw a tantrum over the FEDs actions on Wednesday and as the week wore on, Washington moved towards a shutdown. With this kind of volatility, stop losses and program trades exasperated the moves feeding on individual trader’s fears. There may have been more program and stop loss selling true right before the holiday when fund managers were leaving town. In our opinion, the markets seem oversold. Once the shutdown is resolved, we see a catalyst for a rebound. However, the soonest the shutdown can be resolved will be on Thursday, when Congress returns.
It never ceases to amaze us how emotional traders can be. In the short run, the markets can be very irrational. In the long run they behave much more rationally. This week, the markets plunged after the FED’s announcement on Wednesday. We were bewildered by the market’s reaction. Economists were predicting for months there was a 90% chance of a quarter point hike in December, and that is exactly what happened. Also, economists were predicting that the FED would slow future rate hikes next year, and that is what the FED’s statement said. Perhaps traders had wishful thinking but their disappointment was that the FED didn’t say it would hold on future rate hikes altogether, or curtail reducing their balance sheet. We believe the economic data is compelling not to ignore the possibility of increased inflation in the future. Unemployment is very low and the available labor force is extremely tight. Wages are going up and if they go up much faster than increases in productivity, this will increase inflation. Also, tariffs can boost inflation. So putting political FED bashing aside, the FED’s dual mandates of price stability and full employment have been achieved and if they ignore the possibility of an increase in inflation, significantly above the 2% target, things could spiral out of control, like they did in the late 70s.
This selloff occurred despite mostly good economic news in the U.S. Globally, there was good news as Italy agreed to accept the EU’s 2% deficit cap and China (the world’s second largest economy) announced stimulus including tax cuts next year to help boost growth that has been slowing in wake of the tariffs.
The 10-year treasury yield fell and ended the week at 2.781%. Gold rose and the dollar fell for the week. Still, since the beginning of the year, the dollar has strengthened and gold prices have weakened. Oil prices ended the week down sharply despite Saudi Arabia’s announcement that it would cut production more than it initially committed to.
A few things to put this in perspective and to keep from panicking. While 2018 is shaping up to be the worst stock market year since 2008, it is the best year economically since 2006. Unemployment hasn’t been this low in nearly 50 years. Inflation remains under control, near the FED’s target. Household debt service rations remain near historically low levels. Businesses are not over spending on capital but generally making prudent investments. House prices have recovered but new construction remains modest. We just don’t see the kinds of bubbles that would flash warning signs about the economy.
In the numbers this week:
- The National Association of Realtors reported that existing-home sales rose 1.9% in November from October but are down 7% from last November. A shortage of existing homes and higher mortgage interest rates have been keeping a lid on sales. 30-year mortgages were about 4.0% in January and are now about 4.87%.
- The Commerce Department reported:
- U.S. housing starts increased 3.2% in November. Also, permits, a sign of future housing starts rose 5.0%. For the first 11 months of 2018, start have increased 5.1% from last year. The November numbers showed a 22.4% increase in multifamily housing, while single family starts fell 4.6%, the third monthly decline in a row.
- Durable goods orders increased 0.8% in November. The gain was attributed to a large increase in aircraft orders. New orders for nondefense capital goods excluding aircraft actually fell 0.6% from October. For the 11 months through November durable-goods orders were 8.4% above last year.
- The second revision to 3rd quarter gross domestic product reduced from 3.5% to 3.4% based on slightly slower consumer spending and a slightly bigger drop in exports.
- Consumer spending rose a 0.4% in November. The biggest increases were in durable goods such as trucks and appliances.
- Personal income rose a 0.2% in November.
- The personal savings rate was 6.0% in November which has been dropping since it hit 7.4% in February.
- The Labor Department reported first time claims for unemployment rose 8,000 to a seasonally adjusted 214,000. The four week moving average of claims fell 2,750 to 222,000.
- The Energy Information Administration weekly report is wpsrsummaryattached. Also, the EIA reported
- U.S. Crude oil production remained unchanged at 11.6MM barrels per day.
- Storage of natural gas fell 141BN cubic. Natural gas storage is below the minimum for this date during the past five years.
- According to Baker Hughes, In the past week, the number of active oil rigs rose 10 to 883 and natural gas rigs fell 1 to 197.
Please call us if you have any questions or concerns about your accounts.
Otherwise, have a Merry Christmas!
Loren C. Rex, CFP®, AIF®, MA Erik A Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.