Last week, domestic markets had some of their worst performance in 10 years.[1] The S&P 500 lost 7.05%, the Dow declined 6.87%, and the NASDAQ dropped 8.36%. All three indexes have now lost at least 8% in 2018.[2] On Friday, December 21, the NASDAQ entered a bear market, which means it’s at least 20% below its last record high. Meanwhile, the S&P 500 and Dow both finished the week close to bear markets, too.[3] Internationally, stocks in the MSCI EAFE also struggled, posting a 2.67% weekly loss.[4]
What happened to the markets?
Last week brought a number of economic updates, which gave mixed signals on the economy:
• Consumer spending increased in November.
• Business spending slowed down.
• Economic growth in the 3rd quarter slightly missed projections.[5]
However, markets hardly focused on the data.[6] Instead, two key headlines drove the week’s performance: 1) results from the Fed’s latest meeting and 2) the risk of a government shutdown.[7]
Let’s look a bit more into what happened – and how the markets reacted.
1. The Federal Reserve increased rates and shared its economic projections.
Markets expected the Fed’s 4th interest rate increase for the year.[8] In many ways, traders were trying to read between the lines of every Fed announcement last week to see how sensitive the agency would be to the markets. As a result, investors became concerned about the Fed’s statements that increases could continue in 2019, despite seeing a slowdown in economic growth. This reaction caused some of the sell-offs.[9]
2. A government shutdown loomed – and then happened.
A disagreement between Congress and President Trump about government funding for a border wall continued throughout last week. While a deal had seemed imminent, by Friday afternoon, the political divide continued and a shutdown loomed. Stocks dropped significantly as a result. By Saturday morning, 9 of the 15 federal departments had closed due to the shutdown.[10]
What should you do?
These challenging moments are when keeping perspective is most important. Sell-offs and uncertainty can feel worrisome – and we cannot say for sure how long this market turbulence will continue.
In the weeks ahead, the government shutdown may continue, and we may not experience the strong “Santa rally” that investors hoped for.[11] However, it’s important to remember that, historically, shutdowns are short and don’t typically create negative long-term effects on the economy.[12]
However, when thinking about the current environment, we want to encourage you to consider airline turbulence: During a flight, turbulence can feel unsettling and downright scary. But, you don’t jump out of the plane just because it’s shaking. While you may worry about a crash, the pilots are using every available data point, measurement, and expert to find the safest path to your destination. The unpleasantness almost always calms – and you arrive where you intended to go.
In this same manner, we’re tracking this current turbulence and how it relates to you. No matter what lies ahead, we’re here to pilot you through. If you want to discuss specifics about our economy, your goals, and current momentum, please contact us. We’re always ready to help you understand your financial life.
ECONOMIC CALENDAR
Monday: NYSE Early Close
Tuesday: Markets Closed for Christmas Day
Thursday: New Home Sales, Consumer Confidence, Jobless Claims
Friday: Pending Home Sales Index
Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
[1] www.cnbc.com/2018/12/21/stocks-on-brink-of-bear-market-.html
[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
[3] www.cnbc.com/2018/12/21/stocks-on-brink-of-bear-market-.html
[4] www.msci.com/end-of-day-data-search
[5] www.reuters.com/article/us-usa-economy/u-s-third-quarter-growth-trimmed-business-spending-slowing-idUSKCN1OK1N9
[6] www.reuters.com/article/us-usa-economy/u-s-third-quarter-growth-trimmed-business-spending-slowing-idUSKCN1OK1N9
[7] www.cnbc.com/2018/12/20/us-futures-following-wednesdays-sell-off.html
[8] www.cnbc.com/2018/12/19/fed-hikes-rates-by-a-quarter-point-.html
[9] www.cnbc.com/2018/12/21/stocks-on-brink-of-bear-market-.html
[10] www.bloomberg.com/news/articles/2018-12-22/shutdown-begins-as-trump-and-democrats-negotiate-on-border-wall?srnd=premium
[11] www.reuters.com/article/us-usa-congress-budget/with-no-deal-u-s-government-shutdown-likely-to-drag-on-past-christmas-idUSKCN1OL04C
www.cnbc.com/2018/12/21/stocks-on-brink-of-bear-market-.html
[12] www.usatoday.com/story/money/2018/12/21/government-shutdown-impact-dow-jones-industrial-average/2386933002/