Markets Ending 2018 with Possible Thaw in Trade Dispute, but Gov't Shutdown Continues

It’s about time to ring the bell on 2018, and not a moment too soon, some might add. Though early indications seem to be pointing upward on this final trading day, when the books are closed, 2018 looks to finish with the steepest losses in a decade for the major indices.

Atop the news board as the holiday-shortened week begins are two impasses—one foreign and one domestic—and weekend progress appears to be one-out-of-two. The White House reported “big progress” in trade talks with China, indicating that a comprehensive trade deal could be in the works. On the home front, however, a partial government shutdown looks to carry over into the new year, with the next hopes of a resolution unlikely until at least January 3, when a new Congress convenes.

Today is a full trading day for the major stock exchanges, but markets are closed tomorrow in celebration of New Year’s Day.  

Holiday Wrap

In some sports, they say, “skip the regular season; it doesn’t get interesting until the playoffs start.” That was certainly the case during much of last week if you think about the last hour of trading as the final matches in football or basketball.

On Friday, two of the three main U.S. indices erased solid gains to end slightly lower and snap what would have been a three-day winning streak. The S&P 500 Index (SPX) and Dow Jones Industrial Average ($DJI) ended slightly in the red while the Nasdaq Composite (COMP) managed a small gain that was well below the day’s high.

As stocks seesawed, buying in government debt—often considered a safe haven investment when uncertainty about equities is high—remained elevated, with the yield on the 10-year Treasury continuing to fall and remain well below the psychological benchmark 3% level. (No investment is 100% risk free.)

Although Wall Street’s fear gauge, the CBOE Volatility Index (VIX) continued to come off a recent peak above 36, it was still relatively high compared to where it’s been for much of this year. This seems to indicate that despite some strength in the stock market, investors remain concerned heading into the new year.

The gold market seemed to confirm this. The precious metal, also often considered a safe-haven in times of market turmoil, hit its highest point since June. In addition to safe-haven buying, it also seems likely that gold got help as the U.S. dollar slid against a basket of other major currencies. A weaker greenback makes dollar-denominated commodities like gold cheaper for buyers using other currencies, potentially helping demand.

Friday’s Ups and Downs a Microcosm of Week

On a closing basis, the relatively small percentage moves were in stark contrast to what the market saw earlier in the holiday-shortened week that featured lighter than average volumes. But the intraday moves higher and lower were reminiscent of what investors saw throughout the week’s trading sessions.

The SPX posted its worst Christmas Eve session ever during a selloff on Monday. That selling might have been exacerbated by media reports that Treasury Secretary Steven Mnuchin had called some of the biggest U.S. banks over the weekend to discuss their liquidity.

But on Wednesday, the first trading day after Christmas, the market rallied sharply, with the $DJI posting its largest one-day point gain ever. The market seemed to have been helped by news that holiday sales increased 5.1 percent year over year to more than $850 billion this year.

The following day, stocks spent much of the day lower and investors seemed disappointed by a weaker than expected consumer confidence reading. But then the market staged a massive late-day rally. On Friday, the last bit of trading went the opposite direction.

Will Baby New Year Be Colicky?

Friday’s fade raised questions about momentum going into this week, which is also a holiday-abbreviated week that could also see lower than average volumes exaggerate up or down moves.

The economic calendar looks relatively light. But the week does end with the government’s monthly jobs report, which likely will be closely watched by investors. (See more below.) Other economic reports include data on manufacturing and auto sales.

There isn’t much in the way of corporate earnings reports. The main reporting season won’t come until later in January, which leaves investors to continue to focus on the headlines—potential progress on resolving the U.S.-China trade war, Brexit negotiations, the continuing partial U.S. government shutdown, indications about the Fed’s interest rate trajectory and balance sheet reduction, and anything that would touch on global economic growth.

Figure 1: Roller Coaster. Last week was a wild one for the stock market, as shown by the volatility in the Dow Jones Industrial Average ($DJI - bar chart), S&P 500 Index (SPX - purple line), and Nasdaq Composite (COMP - blue line). Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Pending Home Sales: For a while this year, the economy was humming along strongly and inflation remained low, a scenario that reminded many in the market of the Goldilocks story–the porridge isn’t too hot or too cold. While inflation has remained tame and we’ve continued to see indications that the economy is strong in general, the housing market has been providing signs of weakness. The latest came on Friday with a report showing that pending home sales fell unexpectedly in November. The 0.7% decline came after economists in a Briefing.com consensus had been expecting a 0.5% gain. It’s uncertain to what degree the housing market might huff, puff, and blow the economy down, but it’s something worth keeping an eye on.

Chicago Business Remains Strong: Unlike the weather, the business climate in Chicago remains pretty hot. The latest MNI Chicago Business Barometer, often referred to as the Chicago Purchasing Manager Index and considered a barometer of the broader economy, fell to 65.4. But that’s relatively robust considering November’s solid reading of 66.4 was an 11-month high. “Recording just the fourth year-over-year fall this year, the barometer continues to signal a healthy business environment, notching the 34th consecutive reading above 50,” MNI Indicators said Friday. “Over Q4 as a whole, the headline index averaged 63.4, the best calendar quarter outturn this year.”

Jobs Report On Tap: Although this week overall is relatively light on major economic data releases, the government on Friday is scheduled to release one of the most closely followed–the monthly nonfarm payrolls report. Economists in a Briefing.com consensus expect the economy to have added 180,000 jobs in December. Meanwhile, average hourly earnings are expected to rise 0.3%. That last bit may be especially worth watching as the labor market has been tight and rising wages are a key factor in inflation expectations. The jobs report comes at a particularly sensitive time as market participants have been worried that the Fed might have been too aggressive in its interest rate outlook. A payrolls reading that comes in ahead of expectations could prove to be a double edged sword. Some investors might think that would give the Fed more ammo to raise its key rate, while others may focus on the economic positives of a strong jobs report.