December 2019 Market Review and Outlook
-Murray Titterington, CFP, CIMA
Be careful what you wish for. Last month we hoped for a “Santa Claus” rally in the markets (defined as a rally beginning the day after Christmas and extends through the end of the year). Well, the Dow soared more than 1,000 points on December 26th, the largest 1 day increase in history. But this little post-Christmas gift was not enough to undo an ugly December and a brutal year in general for the markets.
Probably the best two adjectives to describe the markets in December are “historic” and “volatile”, and not in an endearing fashion. The NASDAQ dropped -9.5%, the S&P 500 fell -9.2%, and the Dow Jones Industrial Average lost -8.7%. For the S&P 500 and Dow, this was the worst December since 1931 – during the Great Depression. For the year, the S&P 500, Dow, and NASDAQ plunged -6.2%, -5.6%, and -3.9%, the worst performance since 2008 – during the Great Recession.
The markets’ poor performance is nothing compared to the volatility witnessed during the year: the S&P 500 swung more than 1% in either direction 64 times, and the Dow swung more than 1,000 points five times – significant considering this has only occurred a total of eight times in history. And December provided a particularly wild sleigh ride, ranging from the 1,086 point gain to a -799 point loss (see chart). At its low price on December 24th, the S&P 500 was down more than 20% from its record high, briefly meeting the definition of a bear market.
For the month of December, all of the 11 S&P sectors finished in the red. The “best” performing sectors were Utilities (-4.3%), Materials (-7.2%), and Communication Services (-7.4%). The worst performers were Energy (-12.8%), Financials (-11.4%), and Industrials (-10.8%). For the year, the best-performing sectors were Health Care (4.7%), Utilities (.5%), and Consumer Discretionary (-.5%). The worst-performing sectors were Energy (-20.5%), and Materials and Communication Services (both -16.4%). The gap between Health Care and Energy was more than 25 points, well below the 41 point long-term average gap between top and bottom sectors, which has historically been a bullish signal in the stock market.
Oil continued to freefall, ending the year 40% below the four-year high reached in October. West Texas Intermediate Crude settled at $45.41 a barrel, falling from $50.93 the previous month. Oil market participants will carefully monitor the effects of OPEC’s 1.2 million barrels a day production cut that begins in the new year. Analysts are concerned that the slump in crude demand may reflect a global economic slowdown.
The yield on the 10-year closed at 2.684%, retracing the years earlier rise. During the year, fears concerning wage inflation and fiscal stimulus were replaced by China-US trade concerns and a selloff in riskier assets, leading to a late-year rally in government paper. Recent market developments appear to have prompted a slowdown, if not complete postponement on Fed rate increases in 2019.
Economic indicators were mixed last month. The Chicago PMI fell to 65.4 in December, down 100 points from November’s 66.4. Despite the fall, any reading above 50 indicates improving conditions. The Consumer Sentiment Index rose during the month, ending at 98.3, above the November reading of 97.5. This index remains near historically high levels, indicating consumers still feel confident about income and job prospects, despite the stock market performance. The unemployment rate remained at 3.7%, a 49-year low. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in November on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.2 percent.
2018 was a wild year in the markets, as the gains created by the corporate tax cuts at the beginning of the year gave way to the interest rate hikes and saber-rattling of potential trade wars. The volatility is unlikely to subside in 2019, as the government shut-down just adds one more worry for the markets. We believe that the economy is still healthy and the equity markets will provide long-term growth, but investors should carefully evaluate their risk tolerance when making investment decisions.
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