December 2018 Market Summary By Jack Moller, CFP®

December 2018 Market Summary by Jack Moller, CFP®

Wild November Follows Brutal October

November was another see-saw month that at least arrested some of the selling that we experienced in October.  In the first week of the month, the market rose strongly off the lows set on October 29 (an auspicious date that you may recall was the date of the stock market crash in 1929).  However, in the second week it turned lower again and uncharacteristically experienced a bad Thanksgiving week.  Finally, the month ended in a flourish with two forces underpinning the late-month strength.

• Federal Reserve Policy Shift.  On November 28, Fed Chairman Jerome Powell surprised the market by saying "… (while) interest rates are still low by historical standards, they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth." This seemed to be a reversal of a statement he made less than two months earlier on October 3, when he said "Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral," he added. "We may go past neutral, but we're a long way from neutral at this point, probably."  It is a bit confusing but the gist is that the market believed (I think correctly) that the Fed would not be as likely to aggressively raise interest rates over the next year.  Since then, the bond market has taken off.  Earlier this morning, the 10-year treasury was yielding just 2.8%, down sharply from the 3.25% of early November. 

What is not clear is whether or not a Fed shift would be good for markets.While we know that rising interest rates can create something of a headwind for stock markets, I believe it is important to consider the question of if the Fed is slowing down their rate hiking regime over concerns that our economy may be turning lower?Time will tell.

• Trade War Thaw?  On Saturday, December 1 President Trump and Chinese President Xi Jinping held a much anticipated dinner after the G-20 talks.  President Trump sent some mixed signals leading into the dinner but basically the market rallied into month-end in hopes of some progress in tamping down tensions, if not complete resolution of the open trade issues.  The anticipation followed by President Trump’s post-dinner comments led to a strong rally going into the dinner as well as the first business day following. 

(Note that the “trade dinner” rally sure didn’t last long as the positive first trading day in December was followed by sharp selling interrupted only by the day of mourning in honor of the passing of former president George H.W. Bush.In fact, as the commentators like to use superlatives, the rally into December 3 was the strongest in many years … however, the market reversal then generated the worst December start in at least 60 years!I’m not sure where they come up with all these numbers but suffice it to say that after the amazingly smooth 2017, we are now experiencing big market swings.

As We Move into December...

Of course, my crystal ball remains murky as it has for the past 27 years at Moller Financial.  What I do know is that this bull market is by some measures the longest in history.  Eventually, we will have a bear market with a 20%-plus decline.  We are overdue.  A couple things that we want to keep our eyes on:

• How does the market react to news?  In a strong (bull) market, stocks tend to find ways to rally on not only good news, but surprisingly on bad news.  Recently, that has flip-flopped with stocks falling on seemingly good news.  In particular, as noted above, the Fed seems to be implying that they will not be raising interest rates at nearly the pace that they had projected and that the market had feared.  Normally, markets like lower interest rates and did, in fact, initially react with a strong rally.  However, it did not hold and then selling resumed.  Then, of course, the news out of the Trump-Xi dinner seemed quite positive and the market staged a one-day post meeting rally before resuming, and accelerating, the sell off (though admittedly the trade news turned out much more ambiguous than it had seemed at first).

• Are there signs of capitulation?  This is perhaps somewhat of a gut feel but also can be measured by some indicators.  The panic that we experienced in the February sell off (with the spike in volatility) has been absent so far in this decline.  Investors still seem to be a bit complacent about the recent selling.  It might take more panicky markets before these periodic bouts of selling recede.