Final Trading Day Of 2018 Is Met With Bearish Sentiment For 2019

Good weekend to everyone and with the final trading day of calendar year 2018, I can’t help but desire the calendar year to end with some semblance of positivity. Last week kicked-off a holiday-shortened trading with much anxiety being created for investors on Christmas Eve and as the market meltdown continued. The S&P 500 (SPX) fell into bear market territory briefly and joining the Nasdaq (NDX) and Russell 2000 (RUT).

A sharp market snapback the day after Christmas helped bring the S&P 500 within normal correction territory, but we take the snapback rally with the grain of salt at the moment. Why? To answer that question we have to analyze what caused the market’s meltdown from the all-time highs reached in September of 2018. In order to do so we have to travel back to mid-September.

So what happened in mid-September, which proved to be the peak for the market in 2018? It’s really quite simple, the U.S. Administration imposed another $200bn in tariffs at a 10% tariff rate on Chinese imports. The announcement was made after the markets had closed on September 17, 2018.

Up until this moment, it was widely speculated that some deal would be reached between the two superpowers in an effort to de-escalate the growing tensions that were also spreading around the world. Nonetheless, the market had one last leg higher on September 20, 2018, and before giving way to a 4th quarter 20% decline.

(Click on image to enlarge)

If the trade feud escalation didn’t prove to undo the bull market on September 17th and with additional tariffs implemented, the FOMC only weighed on investor sentiment that much more and when the Fed raised rates.

Along with raising rates by .25 bps on September 26th, the Fed removed the “accommodative” language from its forecast while raising its economic outlook for Q4 2018 and for the whole of 2019.  The removal of seemingly dovish language and raising its economic language seemed to put the Fed on rate hike autopilot, even as a global economic slowdown seemed inevitable in the months ahead. Europe was in political strife and China’s economic data showed a steady slowdown was at-hand. The yuan was tumbling and all the while the U.S. remained the beacon of light for investors. But then came October…

As depicted in the chart above of the S&P 500, the market immediately started to fall at the onset of October and likely under the weight of realizing the trade feud would not find favorable resolution in 2018 and the FOMC was decisively more hawkish and intent on raising rates further. The two factors proved too much to burden for investors in what was also the longest bull market in history. So what now?

January-Earnings Season

Before the New Year begins, pension funds take center stage. As of Dec. 20, Wells Fargo (WFC) estimated defined-benefit pension plans for U.S. corporations needed to shift around $64 billion of funds into stocks before the end of the year.

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