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Stocks close lower on fears of slower global economic growth

Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what is actually happening to the companies in which you’ve invested. – Peter Lynch

In another volatile week for the stock market, the S&P 500 Index closed lower and has now lost nearly 6% in December, making it the worst start to the month since 1980. Both the Dow Jones Industrial Average and the Nasdaq Composite Index also declined last week as geopolitical risks dominated the headlines and fears of slower global economic growth resurfaced. The week began on a promising note as China agreed to reduce tariffs on cars made in the U.S. to 15% from 40% and President Trump said that trade negotiations with China were productive. However, things quickly deteriorated when the European Central Bank (ECB) said that it would end its bond-buying program and uncertainty rose over the outcome of negotiations for a Brexit deal involving the United Kingdom’s plan to leave the European Union. Continued protests in France over President Emmanuel Macron’s high taxes on gasoline and the possibility of a partial U.S. government shutdown if a border wall between the U.S. and Mexico isn’t funded only compounded investors’ worries. President Trump wants $5 billion to build the wall while the Democrats are only willing to come up with $1.3 billion. Unless the two sides are willing to compromise, there promises to be a contentious fight that could result in a government shutdown before Christmas. Ongoing investigations into the Trump administration and more turnover in key government positions at the White House added to the growing uncertainty. The only good news last week came from the inflation data, which indicated that inflation was under control and not a concern. As a result of lower inflation and the prospect of slower economic growth, the 10-year Treasury yield fell to 2.89%. With short-term Treasury yields also declining, it will be interesting to see what Federal Reserve Chairman Jerome Powell does when the Fed meets this week.

Last Week

All of the inflation data released last week was benign as the producer price index (PPI) in November edged slightly higher, with the core PPI that excludes food and energy increasing 2.8% in the 12 months through November. The consumer price index (CPI) was unchanged in November, as expected, as the price of gasoline declined sharply. In the 12 months ended in November, the core CPI rose 2.2%. Import prices in November registered their biggest decline since August 2015 and core import prices only increased by 0.4% in the 12 months through November. Retail sales in November were also better than expected and core retail sales, which exclude autos, gasoline, building materials and food, increased nearly 1%. U.S. industrial production in November was also better than expected. Finally, weekly jobless claims fell by 27,000 to 206,000, their largest decline since April 2015 and better than expected.

For the week, the Dow Jones Industrial Average dropped 1.2% to close at 24,100 and the S&P 500 Index lost 1.3% to close at 2,600. The Nasdaq Composite Index fell 0.8% to close at 6,910.

This Week

The final reading of third quarter gross domestic product (GDP) is expected to be 3.5% and November durable goods orders are expected to record a modest increase after falling last month. November leading economic indicators are forecast to edge slightly higher while both November housing starts and existing home sales should approximate last months’ totals. The final University of Michigan consumer sentiment index for November should remain flat at 98, indicating that consumers remain confident about the economy and its prospects for the future.

The Federal Open Market Committee (FOMC) meets this week and is expected to raise the federal funds rate by a quarter of one percent.

Among the most notable companies scheduled to report earnings this week are Oracle, Red Hat, Micron Technology, Accenture, Wageworks, Darden Restaurants, General Mills, Walgreens Boots Alliance, Fed Ex, Conagra Brands, Nike and Carnival.

Portfolio Strategy

Even though there is increased uncertainty about global economic growth and trade policy with China, the Federal Open Market Committee (FOMC) will likely raise interest rates this week. The Fed is also likely to hike rates because President Trump has been critical of Fed Chairman Jerome Powell and Powell doesn’t want to be seen as caving to political pressure. With a rate increase all but certain, what will also be important is what the Federal Reserve forecasts for 2019 and what language the Fed uses in describing the current state of the economy, its outlook for next year and how that affects their decision. The previous projection of interest rate increases for 2019 or the so-called dot plot called for three quarter-point rate hikes next year. Slowing inflation and the prospect of slower economic growth has altered the forecast of most economists to only two rate hikes in 2019. But the federal funds futures market, which has been the most accurate predictor of interest rate increases, sees only one rate hike next year. Given the recent turbulence in global financial markets, the uncertainty about trade with China, the soft inflation data and slowing growth in China, Fed Chairman Powell will probably strike a dovish tone in his post-meeting press conference.

There will be no Weekly Market Commentary next Monday December 24th as the office is closed for Christmas Eve. Best wishes to all for a very Merry Christmas.