Stocks continued their slide this week. The S&P 500 fell 4.6%, as global growth concerns were exacerbated by negative developments regarding U.S-China trade negotiations and the continued flattening of the U.S. Treasury yield curve. The Dow Jones Industrial Average lost 4.5%, the Nasdaq Composite lost 4.9%, and the Russell 2000 lost 5.6%.
Investors breathed a fleeting sigh relief that trade relations between the U.S. and China did not worsen over the weekend after the two countries agreed to suspend further tariff actions for 90 days to allow more time for trade discussions. Despite President Trump’s optimism, the market’s optimism quickly waned on the supposition that a March 1 deadline to resolve major trading issues won’t be sufficient time to work out major trade issues that have been in place for years.
In addition, the news of the arrest of Huawei Technologies’ CFO Meng Wanzhou heightened these burgeoning trade concerns. Ms. Meng was arrested in Canada amid allegations that the company violated U.S. trade sanctions on Iran. Her arrest invited worries about trade negotiations going awry in the 90-day window and potential retaliation against U.S. companies doing business with China.
Economic growth concerns were cast into the spotlight by a decisive curve-flattening trade in the Treasury market that featured some inversions on the short end. The 2-yr yield (2.70%) and 3-yr yield (2.71%) closed higher than the yield on the 5-yr Treasury note (2.69%) this week.
In a broader context, concerns over future economic growth drove concerns about future earnings growth. That fueled some of this week’s selling interest, which completely unwound the 4.9% gain for the S&P 500 from the prior week at Friday’s low.
The worst performing sectors this week were the financials (-7.1%), industrials (-6.3%), materials (-5.2%), information technology (-5.1%), and health care (-4.6%) sectors. The only two sectors that escaped the week with a gain were the utilities (+1.3%) and real estate (+0.3%) sectors.
The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins. Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL) acknowledging that it saw a moderation in demand in its fiscal fourth quarter, and that it saw the market soften further in November.
Apple (AAPL) conceded more losses this week, as it dragged on the tech space. Apple has retreated over 20% since releasing its quarterly report in October and has remained a signpost of the ongoing effort to liquidate/reduce exposure to this widely-owned sector, which is still the market’s most heavily-weighted sector.
The energy sector (-3.1%) was down for the week, yet it outperformed the broader market, helped by a 3.1% bump in oil prices to $52.52 per barrel.
Energy stocks pared gains on Friday after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts; meanwhile, Iran will reportedly be exempt from the production cut requirements.
Separately, Atlanta Fed President Bostic (FOMC voter) said he thinks the fed funds rate is within shouting distance of neutral, which followed previous remarks from Dallas Fed President Kaplan (non-FOMC voter) who also suggested the fed funds rate is a little bit below neutral. A Wall Street Journal report also suggested that the Federal Reserve might be more cautious-minded about raising interest rates following its December FOMC meeting.
The November Employment Situation Report on Friday seemingly helped substantiate that view. It showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%, which left them up 3.1% year-over-year, unchanged from October. In other words, the wage growth acceleration the Federal Reserve has been bracing for was missing.
Source: Briefing Investor