Holiday Cheer Hard To Find Following Wall Street's Worst Week In A Decade

The market has seen this horror movie before, and it’s being panned by bulls and cheered by bears. The title could be “Deja Vu All Over Again: The Sequel.”

Investors seemed to continue biting their nails Friday on lingering worry over a potential U.S. government shutdown and recent actions by the Fed that seemed to be more hawkish than some were hoping. At some point, the selling appears to have become panicky and may be feeding on itself on continued negative momentum.

Plus, some of the selling could have been related to Friday being a quadruple witching day, which involves the simultaneous expiry of stock index futures, stock index options, stock options and single stock futures. 

These ingredients are just the latest to be added to the bearish cauldron that seems to be bubbling up as some investors probably just want to get this year over with. Trade tensions between the U.S. and China continue to percolate, as do worries about Brexit.

Stocks End Week Sharply Lower

With the pressure seemingly coming from all sides,stocks couldn’t hold on to gains from early in Friday’s session, and each of the main three U.S. indices dropped markedly in a style fitting a week that saw steep losses. A nearly 3 percent loss in the Nasdaq Composite (COMP) pushed the tech-heavy index firmly into bear-market territory. The S&P 500 (SPX) was approaching such a market, and the Dow Jones Industrial Average had its worst week since 2008’s financial crisis, according to CNBC.

Crude slipped again as worries about potentially anemic global demand helped push oil prices lower even as some investors continued to move out of riskier assets. With crude falling, the energy stocks fell again.

But the two biggest S&P 500 sector losses came in communication services and information technology. Closely watched names Twitter Inc. TWTR, Facebook, Inc. FB, and Netflix, Inc. NFLX were the biggest losers in the communication services sector while Alphabet Inc. GOOG GOOGL also fell markedly. In the information technology sector, widely held Apple Inc. AAPL fell more than 3.8 percent.

Investors have been revaluing technology shares sharply lower in recent weeks amid concerns about the trade war between the U.S. and China, and concerns that regulatory authorities could clamp down on tech companies out of concerns over data privacy.   

Just a few months ago companies like AAPL and other members of the FAANG group, were seen as saviors of the market but now many investors seem like they don’t want to have anything to do with them.

That has helped fuel the wider market declines, and it also plays into a broader theme that right now it doesn’t seem like there are places where investors really want to put their chips, so to speak. 

Economic Data on Tap as Year Ends

The economic data calendar is pretty thin during the week of Christmas, but investors are scheduled to get readings on the housing market with indexes on home prices and mortgage applications as well as data on new home sales and pending home sales. (Also, it may be worth remembering that on holiday shortened weeks, trading can be thin which can exacerbate market volatility.)

The housing market has been buffeted by headwinds including rising mortgage rates. Although those have fallen recently, concerns over housing affordability pushed builder confidence in the market for newly-built single-family homes down four points to 56 in December, its lowest reading since May 2015, according to the most recent National Association of Home Builders/Wells Fargo Housing Market Index.

Meanwhile, a weekly survey from the Mortgage Bankers Association showed mortgage applications decreased 5.8 percent from the prior week. Even though mortgage rates have fallen, more potential borrowers were likely avoiding the market because of financial market volatility and uncertainty about the economy, the group said. 

Although headline figures for November housing starts and building permits came in ahead of expectations, they showed little to no growth in single-family starts and permits, reflecting“the impact rising interest rates are having on single-family construction activity,” as Briefing.com put it. Meanwhile, existing home sales in November came in ahead of expectations, but total sales were 7 percent below the same period in the previous year. 

Another report scheduled for coming days is a reading on consumer confidence for December. The American consumer accounts for a huge portion of gross domestic product, and it could be interesting to see whether any of the recent stock market declines have dented sentiment. If it’s anything like the University of Michigan’s Index of Consumer Sentiment, which on Friday showed the final reading for December coming in ahead of expectations, it might show consumers are less concerned about the market than Wall Street is. Still, it may take one more report cycle for consumer sentiment to take a big hit, if at all, from recent stock market declines.

In one marker of consumer health, Nike Inc. NKE reported quarterly revenue and earnings per share that beat analyst expectations, performance that could be seen as a sign that consumers are healthy, or at least optimistic. 

More broadly, retailers have a lot to prove over the next month or so as we wait to see whether a good holiday season translates into strong stock performance. Beyond hitting earnings projections, investors are likely to be looking for retailers to show solid margins and offer strong guidance.

VIX Fix: During another severe selloff, Wall Street’s fear gauge, the Cboe Volatility Index, unsurprisingly remained elevated. The VIX pierced the 30-handle Friday afternoon and climbed as high as 31.35 before settling in just above 30. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Inflation Subdued

In a week of heightened attention to the Federal Reserve, market participants on Friday got a fresh snapshot of the central bank’s preferred inflation gauge--the core personal consumption expenditures (PCE) price index. That measure, which strips out volatile food and energy prices, rose 0.1 percent from October to November, slightly below a Briefing.com consensus expectation of a 0.2 percent rise. That brings the annual core PCE price index reading to a 1.9 percent increase. So, overall, inflationary pressures seem to continue to be pretty tame. Normally that would tend to soothe market nerves, but this time around it’s juxtaposed against investor reaction to Fed action this week that was more-hawkish than some may have hoped. “PCE inflation continues to run below the Federal Reserve's longer-run target of 2 percent, which could raise the market's angst level about the Fed being on course to make a policy mistake with further tightening action,” Briefing.com said.

Q4 GDP Growth Seen Slowing

The latest official figure for U.S. gross domestic product came Friday with the government’s third estimate for Q3 GDP. Economic output increased by an annualized rate of 3.4 percent, slightly under a Briefing.com consensus estimate of 3.5 percent and a downward revision from the previous government figure of 3.5 percent. We won’t see official numbers for the first estimate of Q4 and annual 2018 GDP until January 30. But for now we can keep watching the Atlanta Fed’s GDPNow model estimates. The latest forecast, from Friday, is for Q4 to show a 2.7 percent seasonally adjusted annual GDP rate. That’s down from the previous forecast of 2.9 percent. 

Value Proposition

As we look toward 2019, some investors may be wondering whether the market might be able to recover and reach new highs like it did in 2016, after swooning amid worries about slowing growth. If that is to be the case, it’s likely that value stocks will be a key driver, according to investment research firm CFRA. During the 2016 recovery, value out-performed growth for nine months of the year compared with the historical average of six months, the research group said. CFRA doesn’t think there will be a recession within the next year given recent economic data, a yield curve that is not inverted, positive earnings growth, and strong consumer confidence. “Investor sentiment looks to be the only place where a recession lies,” CFRA said. “As such, we expect investors will continue to gravitate to value over the next several months.”

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