Fear Factor

Fear factor.  Stocks fell in yesterday’s session as traders continued to protest the Fed’s less-than-supportive move on Wednesday.  Expectations were high that the Fed would provide a hero-like rescue for declining asset prices in what was shaping up to be one of the worst Decembers on record for stocks.  After all, the Fed has been a safety net for much of the last decade, in essence, spoiling traders into expecting a lifeline when things got ugly.  December started with a healthy dose of trade fears with no meaningful end in sight and mounting pressure on US earnings as a result.  That same fear has been a constant since October when stocks began to fall from their highs accompanied by lots of volatility.  Adding to those fears were growing worry that the Fed would continue to tighten credit so aggressively that the US economy would slip into a recession. Last month Fed Chairman Powell gave a speech at the New York Economic Club in which he appeared to make dove-ish overtures.  I use the word “appeared” because his statement was not clear leaving it open for interpretation.  As one might expect in a tough year for traders, many began to hope that the Fed would actually pass on the expected December rate hike and stop raising rates completely in 2019.  Interestingly all other signals coming from the Fed indicated a strong and robust economy, which of course would not only justify but also warrant further hikes. Despite equity indices making new highs earlier in the year, 2018 has been a tough year for asset managers who saw much of their already meager gains wash away in the final quarter.  As the year began to draw to a close, managers began to tighten their stop out points in order to minimize further potential losses, accentuating the already present market volatility.  Finally in December, many institutional investors gave up on 2018 and began to look ahead to 2019.  When the FOMC announced on Wednesday that they were raising rates by 25 basis points and expect to raise another two times in 2019, all hopes of a Fed rescue that had been building up since Powell’s speech were dashed.  The selling that ensued has been worsened by the lack of institutional buyers.  Though the Senate was able to reach a budget agreement late Wednesday, a growing fear began to emerge throughout yesterday’s session that the President would not sign off on the proposal and fear became a reality as Paul Ryan, outgoing speaker of the house announced that the President would not sign the proposal.  With the probability of a partial government shutdown increasing, stocks had no chance of recovery.  All of the major indices closed at 52 week lows with the S&P 500 slipping by -1.58%, the Dow Jones Industrials pulling back by -1.99%, the Russell 2000 closing off by -1.72%, and the NASDAQ sliding by -1.57%.  The VIX index had already been rising through the week and it reached as high as 30 in yesterday’s session indicating that fear is very much a part of this recent price action.  Another indicator of fear was Gold which traded up yesterday for a second day.  Gold has historically been the go to commodity when markets are in turmoil.  In recent years however it has been replaced by many other more accurate and desirable hedging instruments, so when Gold trades up on a day like yesterday, you know fear is in the market. Ten year treasury yields spent much of yesterday’s session unmoved but they rallied into the close leaving them around 2.8%.  The ten year will start this morning’s session at 2.79% and the 2/10 yield curve is around 12 basis points after briefly going below 10 yesterday.

Today, we get the GDP figures.  Top line GDP is expected to show an annualized growth of +3.5% quarter over quarter.  Personal consumption is expected to come in at +3.6% flat from last month’s release.  Durable Goods Orders are predicted to have grown by +1.6% after last month’s fall of -4.3%.  Later in the morning we will receive Personal Income and Spending which will include the Fed’s favorite deflator indicators.  The Personal Consumption Expenditures (PCE) deflator is expected to show a year over year +1.8% change versus last month’s +2.0%.  The Core PCE is forecast to be +1.9% year over year versus last periods read of +1.8%.  This will be a busy day for numbers as traders continue to tackle the after effects of Wednesday’s hike along with a looming Government shutdown.  Fear is still in the air which means more volatility will be on today’s menu. Have a great weekend and please call if you have any questions.

daily chartbook 2018-12-21