The last week’s market highlights:
Quote of the week:
“December, being the last month of the year, cannot help but make us think of what’s to come.” – Fennel Hudson
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 4Q 2019 Outlook :
- U.S. economy: Still seeing signs of growth
- Global economy: Downward pressure but no recession.
- Policy watch: Markets expect more easing
- Fixed income: Opt for high quality, longer maturity
- Equities: Get defensive, stay invested
- Asset allocation: While cautious, still prefer emerging-market bonds
Equities: December downdraft déjà vu doesn’t seem likely
Good athletes are known for their “short memories”—the ability to forget recent missteps and focus instead on their next move. Successful investors possess a similar skill, sticking to their long-term plans without dwelling on downturns and bouts of volatility.
But the pain from last December, the worst month (-9%) for the S&P 500 in almost a decade,11 has likely lingered. In fact, the sting from that late 2018 sell-off may well have contributed to 2019’s steep, steady outflows from U.S. equity funds.
Will investors be forced to endure another December drubbing? Probably not, as the market backdrop has changed considerably versus a year ago.
Here are two potential positives that could mean a happier ending for equities in 2019:
No Fed “follies” this time: Last December, the Fed raised interest rates amid waning economic and market confidence. It was their fourth hike of the year. In contrast, when Fed Chair Jerome Powell and his colleagues hold their next meeting on December 11, they’re widely expected to hold the line on rates after having cut them three times in 2019 so far. Barring a sudden “black swan” event or market shock, standing pat on rates should sit just fine with markets. Fed officials have been assuring investors that the economy “is in a good place.” At the same time, the Fed has made it clear it’s prepared to ease policy should the economy demonstrate signs of weakness. In short, markets believe the Fed “has their back.”
The U.K. should be O.K.: The temperature on Brexit has been lowered from a furious boil to a manageable simmer. On December 12, the U.K. will hold a general election that could determine the ultimate outcome of this long-running saga. Polls show current Prime Minister Boris Johnson and his Conservative Party with a substantial lead over Jeremy Corbyn’s Labour Party. Johnson insists that if he wins, Parliament will pass his Brexit deal struck with the European Union (EU) in October. Meanwhile, Corbyn has vowed to add workers’ rights and environmental protection measures, among other changes, to Johnson’s agreement and then put his plan to a vote via referendum.
In our view, a “crash out” (no deal) Brexit—the worst-case scenario for markets and Europe’s economy—is currently lower on the list of probable outcomes than it has been for quite some time. Instead, we think it’s more likely we’ll see one of these three election results:
- Johnson wins a mandate for the U.K. to leave on his previously agreed-to terms;
- An anti-Brexit coalition of Labour and Liberal Democrats stages an upset. This leads to a second Brexit referendum in which voters decide to keep the U.K. in the EU;
- A hung Parliament, which means the U.K. will continue to kick Brexit a bit further down the road. While not ideal, we’d prefer such a stalemate to the U.K.’s leaving without a deal on January 31, when the EU’s Brexit extension is set to expire.
On the other hand—there’s always an “other hand”—two possible headwinds bear watching before we turn the page on 2019:
Trade troubles could negate a Santa Claus rally. The U.S./China trade dispute has dominated headlines all year, with any signs of optimism sending stock prices higher, and any rumors of setbacks having the opposite effect. Although the U.S. and China aren’t close to wrapping up the “phase one” trade agreement announced by President Trump on October 11, the S&P 500 has gained 7.2% over that stretch.12 A so-called “Santa Claus” rally, however—a jump in stock prices that historically has occurred often during the week between Christmas and New Year’s—may be a long shot if the two sides can’t at least agree to delay or cancel the 15% tariffs on $160 billion of Chinese imports scheduled to take effect on December 15. We think the stock market may be too optimistic in expecting those tariffs to be cancelled and about the prospects for a deal in general.
Capitol concerns. The Trump impeachment hearings on their own are unlikely to move markets. But if they contribute to a disruption of government functioning (keeping the lights on, passing the U.S.-Mexico-Canada trade pact to replace NAFTA), stocks could suffer in the near term.
The possibility of another government shutdown looms, as the four-week budget extension passed by Congress expires on December 20. Last year’s shutdown badly hurt fourth-quarter consumer spending, which in turn contributed to the S&P 500’s December decline. The odds of a similar closure this year appear low for now, but if one materializes it could dampen spending and awaken equity bears at a time when consumers are increasingly expected to prop up economic growth.