We're off to a slow start.
December is usually the best month of the year for the stock market. It has been since 1950, according to Randall Forsyth of Barron's, but not so far this year.
Two issues made investors particularly uncomfortable last week which helped trigger a sell-off that pushed major U.S. stock indices lower.
- Fading optimism about an easing of trade tensions with China. It looked like the relationship between the United States and China might thaw, and Americans were feeling pretty optimistic about a trade truce. In fact, markets moved higher Monday in anticipation.
Unfortunately, on the same day that Presidents Trump and Xi Jinping shared a cordial dinner,
the chief financial officer of a major Chinese telecommunications firm was arrested at the
request of the United States.
The Economist
reported, "[The company] is a pillar of the
Chinese economy - and Ms. Meng is the founder's daughter. The fate of the trade talks could
hinge on her encounter with the law."
2. A section of the yield curve inverted. Normally, Treasury yields are higher for longer
maturities of bonds than for shorter maturities of bonds. Last week, yields on three-year and
five-year bonds inverted, meaning yields for three-year bonds were higher than those for five-
year bonds. Ben Levisohn of Barron's explained:
"Usually when people talk about an inversion, they're talking about the difference between two-year and 10-year Treasuries, or three-month and 10-year Treasuries, which have been useful, though not perfect, predictors of recessions and bear markets. Last week, though, everyone was talking about the three-year and the five-year Treasury inverting - something that usually doesn't get much notice...And for good reason."
Historically, these maturities have inverted seven times. In one instance, the country was already in recession. On the other six occasions, recession didn't occur for more than two years. Barron's reported the Standard & Poor's 500 Index gained an average of 20 percent over the 24-month periods following these inversions.
Investors' negative response to last week's news may have been overdone. Financial Times reported European and Asian markets firmed up a bit Friday "...as buyers stepped back in after some savage falls on Thursday."
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Data as of 12/7/18
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-4.6%
|
-1.5%
|
-0.2%
|
8.2%
|
7.8%
|
11.2%
|
|
Dow Jones Global ex-U.S.
|
-2.2
|
-14.2
|
-11.3
|
2.6
|
-0.4
|
5.2
|
|
10-year Treasury Note (Yield Only)
|
2.9
|
NA
|
2.4
|
2.2
|
2.9
|
2.7
|
|
Gold (per ounce)
|
2.1
|
-4.1
|
-0.9
|
4.9
|
0.1
|
5.0
|
|
Bloomberg Commodity Index
|
1.1
|
-5.3
|
-0.4
|
1.6
|
-7.9
|
-2.7
|
|
DJ Equity All REIT Total Return Index
|
0.3
|
4.4
|
5.1
|
8.0
|
10.1
|
13.7
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
