Market Preview: Markets Rally, But Still Face the Fed, Trade Wars, and Global Slowing Headed into 2019

Markets ended 2018 with something of a whimper after all the volatility in the fourth quarter. While there were no extreme swings, it was still an up and down day for the averages which all managed to close in positive territory. The DJIA was up 1.15%, the S&P 500 climbed .85% and the Nasdaq finished the day up .77%. This placed all the averages down on the year, with the final numbers coming in at the DJIA down 5.63%, the S&P 500 off 6.24% and the Nasdaq wrapping up 2018 down 3.88%. It was an unusual year for the markets in many ways. But, one of the most unsettling for investors, was the fact that at the end of the third quarter the markets were handily in positive territory, only to finish negative for the year.

For the first time in history the S&P 500 finished the third quarter in positive territory and then ended down on the year. At the end of September, the DJIA was up 8%. The swiftness of the decline has been attributed to algorithmic and automated trading by many pundits. But, the genesis of the negative action is clearly attributable to an interview given by Federal Reserve Chairman Powell. In the interview, he noted interest rates were a “long way” from neutral, the Fed’s target rate. Following Chairman Powell’s declaration on October 3rd, markets turned negative and never could find solid footing, even with a few extreme rallies, not uncommon in a bear market.

The questions for investors now is, where are markets headed in 2019. Market analysts are all over the map, predicting large rallies in some camps, and urging continued, or additional, caution in others. Some are pointing to historical markers, there have only been four back-to-back down markets since 1929, and others are focused on valuations. Barring a further deterioration in earnings, many believe markets are slightly undervalued here and the selloff represents a buying opportunity headed into the new year.

Whichever camp you favor, the issues facing markets as we head into 2019 remain unchanged from those that brought the market to its knees in the fourth quarter. The Fed, though softening its stance slightly, is still predicting two rate increases in 2019, and perhaps more importantly seems bent on improving its balance sheet and moving full steam ahead on quantitative tightening (QT). Though there were positive tweets from President Trump on the trade situation with China over the weekend, most believe the trade war between the two countries will at best be resolved late in the first quarter of 2019, and at worst may linger on into the summer. And finally, global economies, namely China, are clearly slowing. The major question is whether QT by other global banks will bring about a global recession.    

No economic data nor earnings will be released on Tuesday as the markets take a break to celebrate the New Year holiday. No earnings are currently scheduled for Wednesday.

Economic data to be released Wednesday includes Redbook retail data and the PMI Manufacturing Index. The comparable store sales data for chain stores, discounters, and department stores is expected to show a 7.8% year-over-year increase. While other economic data, such as regional Fed manufacturing surveys and housing numbers, have pointed to a weakening economy, the retail numbers have been very strong this holiday season. The PMI Manufacturing Index is expected to show no changes from the earlier flash number and settle at 53.9 for December. This is a slight decrease from the November PMI of 55.3.

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