December Market Commentary

US stocks dropped again in December nearing bear market territory before rebounding partially to end the month.  It was the worst year for US stocks since the financial crisis.  Fears of slowing global growth dominated investors’ minds over the month.  Also weighing on stocks were the future moves of the Fed, the trade squabble with China and US government shutdown.  Economic news is still generally solid, but it has cooled since earlier in the year.  The November jobs report showed 155,000 new hires, slightly below expectations and wage gains held at 3.1%. US retailers posted one of the best holiday shopping seasons in years with sales rising 5.1% over last year and consumer spending increased for the 9th straight month.  However, durable goods orders fell for a third straight month, consumer confidence fell for a second straight month and home price growth was flat.  Oil ended the year at $45.51 a barrel despite an agreement from OPEC members and Russia to cut production by 1.2 million barrels a day.  Oil fell 25% over the year.  In December, US stocks plunged, falling 9.31% and 14.30% for the fourth quarter.  For the year, US stocks were down 5.24%.

Foreign stocks fell over the month on global growth fears, but held up better than US stocks.  China and the US agreed to postpone an increase in tariffs for 90 days to allow for further negotiations to a deal, however the nations still remain far apart. The European Central Bank announced it was ending its bond purchase program, lowered its forecast for growth by 0.1% for 2019 and 2020 and said they would hold on to their bond portfolio for “an extended period of time.” Industrial production in China in November slowed more than expected and retail sales growth fell by the most in over 15 years. French business production contracted for the first time in two and a half years and Germany’s Purchasing Managers Index reached its lowest level in four years.  UK Prime Minister May postponed a vote in parliament of her Brexit agreement and vowed to go back to the negotiating table to work out a deal that might have a chance of passing.  Emerging markets topped developed markets in December and the fourth quarter, however developed markets outpaced for the full year.  International stocks sank 4.48% in December and 11.44% for the quarter.  Over 2018 international stocks declined 13.87%.

Bonds surged in December as investors flocked to safe havens on a substantial increase in concern for global growth.  At the Fed’s December meeting they voted to raise the Fed Funds rate a quarter percent to a range of 2.25% to 2.5%.  They also lowered their growth outlook for 2019 from 2.5% to 2.3%. In comments after the meeting Chairman Powell suggested the Fed would target two interest rate increases in 2019.  The 10-year Treasury yield ended the year at 2.69%, its lowest level since the end of January, down from 3.01% to start the month, but up from 2.40% at the start of 2018.  For the month and quarter, Treasury bonds were the top performing sector and longer-term bonds topped shorter-term bonds.  For the year, Agency, Municipal and International bonds were the top performing sectors and shorter-term bonds topped longer-term bonds.  The broad bond market gained 1.84% in December and 1.64% in the fourth quarter. For the year, bonds were flat edging up 0.01%.