Overall, 2018 was an up and down year for markets. Unfortunately, December brought the most downs of all, with markets having their worst month in recent memory, bringing returns for stocks lower on the year. This leaves a great deal of uncertainty heading into the new year.
A month to forget
December was a month investors would like to forget. Not only did December bring a unusual market downturn, prices fell in a historically negative way. It was the worst December for the stock market since the Great Depression, with the S&P 500 falling by 10.16% on the month.
The market was non-discriminatory in taking down large corporate giants. General Electric (GE) saw its stock fall 57% on the year, Goldman Sachs (GS) fell by 34.4%, and Caterpillar (CAT) was down almost 20%. The bright spots in the markets (which were only bright because they were able to stave off massive losses) came in health care, utilities, and consumer discretionary goods.
Fed raises rates
Meanwhile, even as stocks are taking a nosedive, the Federal Reserve sees signs of a positively growing economy. For this reason, the Fed decided to raise rates once again in December by 0.25% to 2.25%-2.50%. While this marks another in a long line of consecutive rate hikes, in the bigger picture rates are still significantly lower than they were before the recession in 2008. In fact, rates currently sit at only half that of rates in 2007.
The Fed has made it clear it expects to raise rates even further in 2019. This has drawn the ire of President Donald Trump who became enraged at the Fed’s actions and sentiment. Still, this has not deterred Fed Chairman Jerome Powell who is determined to be an independent entity, not influenced by the President. “Nothing will deter us from doing exactly what we think is the right thing to do,” Powell responded.
Jobs and wages look promising
The markets might be down, but job and wage growth are reasons for optimism. The US added 312,000 jobs during the month of December, a strong showing during volatile economic and geopolitical times. As a result, the unemployment rate rose slight to 3.9%, a rise being viewed as positive as it reflects more jobseekers on the market.
However, job growth wasn’t the only positive thing to show in the labor market, as hourly pay rose 3.2% compared to a year ago. Wage growth is an important metric in ensuring that the jobs hourly employees have will pay them a livable wage.
US economist Eric Winograd at AllianceBernstein sees positivity in this labor market, but questions how long falling stock prices and a positive labor market can run together. “The labor market is very strong even though the economy appears to be slowing,” said Winograd. “Those two things cannot coexist for very long. Either weakening demand will lead firms to dial back the pace of hiring or the robust pace of hiring will lead firms to ramp back up production.”
Volatility is back
It may seem as if 2018 was one of the most volatile years on record, but that’s only because stock prices were extremely muted the year before. During 2018 stock prices swung by more than 1% on 65 days throughout the year. Compare this to 2017, when this occurred on only 8 days, and it appears as though markets were wildly out of whack. However, in 2016, price swings of this nature happened on 61 days, much closer to that of this year.
Still, December itself was a bit of a wild ride, with the Dow falling more than 350 points on six different occasions, and even one day in which the Dow had its highest point gain ever, closing up by 1,000 points.
Oil prices stay lower
While consumers are happy about lower prices at the gas pump, lower oil prices are making corporate giants nervous. To end the year oil prices fell close to 40%, mirroring the recent price drop in stocks and other markets.
Several large banks believe oil prices will continue to be suppressed in the coming year. A survey conducted by the Wall Street Journal of 13 investment banks found that bankers expect brent crude to come in at $69 per barrel in 2019, down from a previous estimate of $77 per barrel.
Some believe the price of oil will be tied to the global economy in the coming year. CEO of Qamar Energy, Robin Mills, noted, “The dominant factor on the demand side will be the economic outlook. It will receive some support from lower oil prices but overall the global economy appears likely to slow.”
China a big reason for global slowdown
Uncertainty is pervading markets heading into 2019, leading the International Monetary Fund to revise its global growth expectations downward to 2.5%. This is significantly lower than the 2.9% growth experienced in 2018.
One of the biggest things bringing fear to global markets is potential deflation in China. The world’s largest economy is seeing a rise in pressure for deflation from an economy which is underperforming. Federal Reserve Bank of Boston President Eric Rosengren sees it getting worse before it gets better for China. “They’re dealing with an economy that’s slowing down, dealing with possible trade issues that could become very substantial if there’s no agreement made, and they have an awful lot of leverage in their economy, which means that the slowdown could be much more than they’re anticipating,” Rosengren said.
The slowdown in China is seen in a weakening in demand for goods and services throughout the country. Car sales in the country fell for the first time in 20 years, and demand for electronics is also falling, putting exporting nations such as South Korea and Taiwan in a precarious position.