It was another tough week for equity markets, following the worst week of the year, as investors continued to adopt a “risk-off” approach ahead of the FOMC meeting this week. The investor pessimism was evident in fund flows, with Lipper reporting a record $46 billion in outflows in the most recent week (data started in 1992). Bond funds lost a near-record $13 billion, while money market funds gained a record $81 billion. The American Association of Individual Investors survey showed bears jumping to 48%, the highest since 2013, while bulls are just 21%. The CNN Fear & Greed index is at 8 on a scale of 0-100 (“extreme fear”), as near the lowest reading on record.
Accelerated by relatively low trading volume, the weakness continues to be driven by worries on Fed policy and trade tensions. Expectations for rate hikes continues to adjust to the outlook for lower global growth. There is growing acceptance that a hike is coming this week, with the odds at 78% versus 69% a month ago. The Fed Funds curve, however, shows a “one-and-done” approach, with the next hike not priced in until September, and an 80% chance of only two total hikes by the end of 2019. Wednesday’s FOMC decision, along with the statement and the press conference, will be the primary driver of trading this week.
We are at a critical technical support level currently, with the S&P 500 Index breaking below the October low, and retesting the lows from February and April of this year. Small caps are near bear market levels, down 8% for the year, and down 19% since the end of August. The VIX is not signaling the same degree of panic as the equity market, as the reading of 23 is half the level that we saw in February.
Global Growth: The acceleration in selling last week came following reports from China that industrial production growth was the lowest since 2016, and retail sales the weakest since 2003. This, along with eurozone PMI at a 49-month low, reinforced worries around global growth. Results in the U.S. remain reasonably upbeat, with strong retail sales and tame inflation, though (similar to early 2016), global growth worries are trumping domestic results.
Trade: There were positive developments in the trade dispute with China last week, including reports that they have resumed purchasing U.S. soybeans, suspended punitive tariffs on U.S. autos, and are inclined to back away from the “Made in China 2025” policy. These gestures are viewed positively but are insufficient to reach a deal by March. President Xi is making a speech commemorating the 40th anniversary of the economic opening on Tuesday, where he may address accelerating reforms.
Strategists Outlook: Despite the recent volatility, Wall Street strategists remain upbeat in their outlook for 2019. The median prediction is for a 14% gain in the S&P 500 and are cautiously optimistic on a deal with China. They see healthy consumer demand and continued business investment, while worries about an aggressive Fed have faded. Worries include trade tensions and the duration of the U.S. economic and market expansion.
The S&P fell more than 1% last week, following a 5% decline in the previous week. For the year, the total return for the S&P is -1%. The Dow and NASDAQ were also down roughly 1%. The selling was reasonably indiscriminate, with growth and value down in line and small caps lagged. Leading sectors included the safe-havens of utilities, communication services and consumer staples, while financials, health care and industrials lagged. Global stocks continued their run of outperformance, with developed and emerging markets higher for the week.
Interest rates are not showing the same degree of “risk-off,” with the 10-year yield 0.04% higher than ten days ago. Over that period, the curve steepened marginally, though it remains near the narrowest level of the cycle. Credit spreads narrowed modestly. Oil prices have stabilized, with worries on global growth offset by the potential impact from an OPEC agreement to limit supply.
What to Watch
The FOMC meeting will attract the majority of investor attention this week, though the speech by President Xi is also important. Economic data this week includes housing starts, existing home sales, leading indicators, durable goods, consumer sentiment, personal income and spending, and final third-quarter GDP.