Market Review February 2018

After an extremely positive start to the year, the global economy has come back down to earth in what has been a volatile and unpredictable month. Led by a market sell-off, some analysts believe that as a whole the global economy is not done growing and positive signs are still to come.

 

Market Correction?

The beginning of 2018 continued the bull market that was seen in the previous year. However, February brought investors back down to earth, with a market correction that saw the Dow Jones Industrial Average 12% in just two weeks to start the month, and bringing out the bears who felt it was time for an even deeper market correction.

While investors worried about the continued market sell-off, stocks ended the month surprisingly well, with the Dow recovering from below 24,000 to end the month settling just above the 25,000 mark, and the S&P recovering to above 2,700. This bodes well for the market that was thought to be ready for a 2018 bear run when February began. March has reason for investors to be optimistic, as it is historically the second best performing month for the market, bringing gains each of the last 20 years, with a 4.1% average return.

 

Slower US economic growth

It turns out that the surge in consumer spending caused economic growth the be slower than expected for the fourth quarter in 2017. A glut of imports were needed to keep up with consumer demand, as domestic businesses failed to match the supply needed for the market during the holiday season. This caused a slight downward revision in economic growth, from the expected 2.6% to 2.5%, which was drastically lower than the 3.2% experienced in the prior quarter.

Initial data for the first quarter of 2018 showed the trade deficit continuing to increase with showing no signs of letting up. A reduction in factory activity across the Midwest of the country for the month of January is a negative sign to start the year. As one economist noted, “An economy that is at or beyond full employment … cannot match this pace of demand growth and, therefore, must either sell from inventory and/or purchase from abroad.”

Protectionism could hurt the global economy

The push towards nationalism has left global trade in a precarious position. Nations are beginning to look inward to fill their own needs, doing everything they can to not rely on the global trade that has supported economic growth through the past several decades. Nowhere is this more prevalent than the United States, where President Donald Trump continues to push American protectionism to new levels. A report by the Economic Intelligence Unit claimed, “There’s a risk that the administration of the US President, Donald Trump, translates its protectionist rhetoric into more concrete action that severely damages global trade channels.”

DG Azevêdo, the Director of the World Trade Organization (WTO) noted the uptick in global trade, but see questionable forecasts in the future. In a statement at the end of the month Azevêdo stated, “Trade is in fact growing at a sustained pace that we have not seen since the global financial crisis. This is good for economic growth, jobs and development. But while the forecasts are positive, they are also fragile. The uncertainty is still there – including the threat of protectionism.”

 

Amazon makes a large purchase

With a reported purchase price above $1 billion, the tech giant has acquired the smart doorbell maker Ring, its second largest acquisition to date. Amazon is expected to use the technology supported by Ring to allow for direct, in-home delivery of packages with authorization. The technology could potentially be used with facial recognition, smart keys, and other innovative ways to verify information.

 

Comcast shunned over acquisition bid

After Fox’s agreement to purchase European TV provider Sky fell through due to regulatory concerns, Comcast swooped in to make a bid itself. Comcast’s proposal to purchase Sky for $31 billion was significantly higher than Fox’s original bid of $25.8 billion for the European giant. As a result its stock experienced a 7% drop in price immediately following the announcement, which caused many analysts to wonder if the company is severely overpaying.

While Sky has over 23 million customers across Europe, its satellite TV business exposes Comcast to market unknown market pressures. An analyst following the deal noted, “Though the downside in Comcast (CMCSA) shares is limited after yesterday’s move, we believe the unpredictability could cap near-term upside.”

 

Analysts mixed on the direction of oil prices

Prices of oil fell over the month of February, with the price of crude ending the month just below $62 per barrel. With many economic factors still uncertain, analysts are having a hard time speculating on what direction prices will go in the coming months.

 

Investment banks were split on where the price of oil is headed, with an unpredictable supply market and United States producers playing a key role. One economist noted, “That its [the U.S.] oil market is dominated by a large number of uncoordinated, private-sector firms, many of whom benefit from lower production costs than producers elsewhere, means the U.S. will remain a major player for the foreseeable future.” US crude oil production rose to over 10.2 million barrels per day, the most weekly production seen since 1983.

 

The fast growing Indian economy

The country, which has seen its economic growth slow in recent years, reported a positive increase in growth over the fourth quarter of 2018. A 7.2% growth rate dwarfed the country’s previous quarter growth of 6.5%, and overtaking China as the world’s fastest growing major economy.

The tax overhaul implemented by Prime Minister Narendra Modi last year, which included the controversial measure to ban the country’s two largest bank notes, seems to now be paying dividends for India. This is welcome news after Modi was criticized for his lack of oversight in a $1.8 billion fraud scheme conducted at one of the nation’s largest banks. Modi has noted that he believes a future growth rate of 7.5% is not out of the question.

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