/perspectives/weekly-viewpoint/slowing-but-still-growing

Slowing but Still Growing

The major market indices finished the week mixed to lower as investors weighed progress in the US/China trade talks against political brinkmanship in Washington and signs the global economy continues to slow.

December 17, 2018    |    By Mike Schwager

Performance for Week Ending 12/14/2018:

The Dow Jones Industrial Average (Dow) fell 1.18%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.37%, the Standard & Poor’s 500 Index (S&P 500) dipped 1.26% and the Nasdaq Composite Index (NASDAQ) shed 0.84%. Sector breadth was negative with 9 of the 11 of the S&P sector groups finishing the week lower. The Utilities sector (+0.64%) was the best performer while Financials (-3.54%) was the worst.

Index* Closing Price 12/14/2018 Percentage Change for Week Ending 12/14/2018 Year-to-Date Percentage Change Through 12/14/2018
Dow 24100.51 -1.18% -2.50%
Wilshire 5000 26778.22 -1.37% -3.62%
S&P 500 2599.95 -1.26% -2.76%
NASDAQ 6910.66 -0.84% +0.11%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 12/10/2018 – 12/14/2018

The major market indices finished the week mixed to lower as investors weighed progress in the US/China trade talks against political brinkmanship in Washington and signs the global economy continues to slow. Uncertainty ahead of the upcoming FOMC meeting added to the cautious tone. While a quarter point rate hike at the end of Wednesday’s meeting is widely expected, investors will be looking for guidance on the forward rate path. In recent weeks, several Fed officials, including Chairman Powell, have taken on a more ‘dovish’ tone by suggesting that rates are getting close to the ‘neutral’ level (i.e. the level that rates are neither helping or hurting the economy). Powell also stressed that future rate decisions would be based on incoming data.

Powell will really have to “stick the landing” at the after-meeting press conference as the dovish pivot was viewed as a suggestion that the Fed may hike rates less than previously projected. More specifically, investors will be looking to see if the Fed Chair will indicate that three hike are still likely next year (as indicated by the September “dot-plot”) or will he underscore the focus on data dependency and whether the recent swoon in the markets, signs of slowing global growth, the trade war uncertainty could warrant a slower path forward and/or the potential for a pause.

Modest Progress in Trade Talks: Early in the week, China's chief trade negotiator, Liu He, spoke with U.S. Treasury Secretary Steve Mnuchin and Trade Representative Robert Lighthizer by phone and agreed to work toward the framework of talks set during the G-20 leaders' summit in Argentina. "Both sides exchanged views on putting into effect the consensus reached by the two countries' leaders at their meeting and pushing forward the timetable and road map for the next stage of economic and trade consultations work."

Later in the week, the Wall Street Journal reported that China was drafting a replacement for Made in China 2025 - President Xi's blueprint to make the country a leader in high-tech industries - which would play down China's bid to dominate manufacturing and be more open to participation by foreign companies. Lastly, China confirmed it would eliminate the retaliatory tariffs recently placed on US auto imports -- which would take the tariff rate down from 40% to 15%. While getting to the finish line is still a way off, these steps are signs that both sides are making an attempt to deescalate the trade tensions.

Shutdown? Last week, President Trump threatened to shut down large parts of the federal government over funding for his proposed border wall. The President openly quarreled with Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi, asserting that "one way or another it is going to be built" and that he would have "no other choice" but to shut down the government if he doesn't get enough funding for the wall. Lawmakers have until Friday, December 21 to reach a funding agreement. If a stalemate occurs, and the government shuts down, the near-term reaction would likely be negative. However, it is important to point out that 75% of the government has already been funded (due to an agreement reached over the Summer), meaning the impact of a shutdown would be limited to the remaining 25%, so the impact would likely be minimal.

According to a report from LPL Research, equity markets tend to take shutdowns in stride. In fact, the S&P 500 has actually posted positive performance during each of the five previous shutdowns, with an average gain of +1.36 percent.

Price Discovery: The recent choppiness in the markets seems to suggest that we are in a period of “price discovery” where investors are trying to figure out what is already priced into the market and what is likely to come to fruition in the months and quarters ahead. While uncertainty is likely to remain elevated for the foreseeable future, at the end of the day it is macro fundamentals that ultimately drive equity prices.

The US economy is still forecast to post positive growth in the year ahead, although the pace of growth will be more modest than what we’ve seen during the recent past. According to Bloomberg, consensus expectations are for growth to slow to 2.6% in 2019 down from the estimated growth of approximately 3% for 2018 and well off the 4.2% growth posted during the second quarter of this year. While growth is slowing, it is still expected to be better than the 2%-or so average growth that we’ve seen during the current cycle. In fact, a slowdown of economic growth could actually prolong the bull market as it would likely will keep the Federal Reserve from aggressively raising interest rates.

Corporate earnings, which are the key driver of equity prices, are also forecast to slow, but are still expected them to remain positive. Current expectations are for the S&P 500 to post year-over-year growth of 24%, followed by high single digit growth in 2019.

If there has been a silver lining in the recent correction in stock prices, it has been the sharp contraction in the market’s valuation. Based on the 2019 consensus earnings estimate of about $177.50/share, the S&P 500 now trades for 15-times earnings, well below the 18-times earnings at the start of the year.

Contrarians take Note: The percent of Bulls in the American Association of Individual Investors (AAII) weekly survey fell to 20.6%, the lowest level since mid-2016 while the percent of Bears rose to 48.9%, the highest since April 2013. Investing, in its simplest form, is about emotions – fear & greed. These emotions also tend to be contrarian in nature, meaning investors tend to be the greediest (Bullish) at/near market tops and the most fearful (Bearish) at/near market bottoms.

The Week Ahead: The focal point for the coming week will be the two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday at which the Fed is widely expected to hike rates by 0.25%. The meeting announcement and updated Summary of Economic Projections (SEP) will be released at 2:00 p.m. Eastern Time on Wednesday. Chairman Powell will follow with a press conference at 2:30 p.m. The earnings calendar will start to inch back into the picture with 13 members of the S&P 500 scheduled to release results including two members of the Dow Jones Industrial Average. The data calendar will be very busy, with several reports due out on the housing and manufacturing sectors. Reports of interest include; the December Empire State Manufacturing Survey, the December housing market index, November housing starts. November existing home sales, the December Philly Fed business outlook survey, November durable goods orders, the final revision to third-quarter GDP, November personal income and outlays and the University of Michigan’s final December consumer sentiment report.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.


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