Telemus Weekly Market Review December 3rd - December 7th, 2018

December 3 – December 7 Week in Review

The markets returned to their losing ways last week with the S&P 500 falling 4.60%, the Dow Jones Industrial Average lost 4.50%, the Nasdaq Composite lost 4.93%, and the Russell 2000 lost 5.56%. It was a shortened week of trading with the market closed Wednesday in recognition of the national day of mourning for President George H.W. Bush. Overseas, global markets finished last week with large losses as well. Germany's DAX led the European retreat and Japan's Nikkei led the decline in Asia.

The week started off with investors initially breathing a sigh of relief that trade relations between the U.S. and China did not worsen over the previous weekend after the two countries agreed to suspend further tariff actions for 90 days to allow more time for trade discussions. Despite President Trump's optimism that a deal would be reached, the market's optimism quickly waned on the supposition that a March 1 deadline to resolve major trading issues won't be sufficient time to work out major trade issues that have been in place for years.

In addition, the news of the arrest of Huawei Technologies' CFO heightened concerns. Meng Wanzhou, who is also the daughter of the founder of the company, was arrested Dec. 1 in Canada at the request of the U.S. amid allegations that she helped the company violate U.S. trade sanctions on Iran. Her arrest invited worries about trade negotiations going awry in the 90 day window and potential retaliation against U.S. companies doing business in China.

The worst performing sectors last week were the financials, industrials, materials, information technology, and health care sectors.  The only two sectors that escaped last week with a gain were the interest rate sensitive utilities and real estate sectors.

The financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins. Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November.

Transport stocks weighed on the trade sensitive industrial sector. The Dow Jones Transportation Average dropped 8.0% last week led by a more than 16.0% decline in the price of American Airlines shares.

Apple lost more ground last week and has retreated over 20.0% since releasing its quarterly report in October and has remained a signpost of the ongoing effort to reduce exposure to the widely owned tech sector, which is still the market's most heavily weighted sector.

The energy sector was down last week, but it outperformed the broader market, helped by a 3.1% bump in WTI to $52.52 per barrel. Energy stocks pared gains on Friday however after OPEC and Russian producers agreed to a cut of 1.2 million barrels per day to address weakening oil prices. On a related note last week, Qatar, in a surprise move, announced plans to withdraw from OPEC to focus on gas production. Qatar has been a member of OPEC since 1961.

The release of the November Employment Situation Report on Friday helped substantiate the view that the economy may be slowing. It showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%, which left them up 3.1% year-over-year, unchanged from October. 

A number of Fed governors last week echoed Chairman Powell’s recent comment that the fed funds rate may be getting close to neutral. Economic growth concerns were cast into the spotlight by a decisive curve flattening in the Treasury market last week that featured some inversions on the short end. The 2 year yield and 3 year yield closed higher than the yield on the 5 year Treasury note last week. Also, the difference between the 2 year and 10 year yields narrowed to its slimmest margin since 2007. The 10 year Treasury closed at 2.85% on Friday, a drop of 16% basis points for the week as investors traded stocks for the safety of the Treasury market.

December 10 – December 14 Economic Calendar