Before The Bell
The U.S. equity market started last week on a positive note, with investors encouraged by some trade talks and awaiting the Federal Reserve’s monetary policy decision. However, the major indexes reversed course in the latter part of the week, with a notable selloff on fears of slowing global growth. Those concerns spiked on Friday when the yield curve became inverted, historically a sign that a recession may be forthcoming. It was the first time that the yield curve inverted since August 2007. The Federal Reserve’s decision last Wednesday to hold interest rates steady and commentary suggesting that a tightening in 2019 is looking unlikely also hurt equities, as investors are viewing the central bank’s dovish tone as an indication the Federal Reserve is worried about a slowing in the economy.
On Friday, the selling was broadbased, with the Dow Jones Industrial Average, the tech heavy NASDAQ, and the broader S&P 500 Index down 460, 196, and 54 points, respectively, finishing the day at session lows. It was the worst day for the index of 30 bellwether companies since January 3rd. The Dow 30 has finished lower in three of the last four trading weeks. As noted above, the primary culprit were concerns about slowing economic growth both here and abroad. China’s economy has been slumping for some time, hurt by the ongoing trade dispute between the Asian powerhouse and the United States. Likewise, the euro zone is witnessing slowing growth, with fears that Germany, the confederation’s largest economy, is heading toward a recession. The yield on Germany’s Bund note is negative right now, which, like the U.S. yield curve inversion noted above, may be an indication that Germany’s output is slowing. The fears of a global economic slowdown slammed stocks on Friday.
The figures for last week’s final trading session were rather ugly. The selling in the mid- and small-cap sectors was even more prominent than in the large cap arena, with the small-cap Russell 2000 falling 3.6% on Friday. Declining issues led advancers by a considerable margin on both the Big Board and the NASDAQ, to the tune of nearly four to one on the former. All of the 10 major equity groups were weaker, with notable declines in the economically sensitive areas. Investors were clearly unnerved by the yield curve inverting and quickly move out of riskier equities. The CBOE Volatility Index (or VIX), a measure of the fear in the market, spiked more than 20%, finishing the week just short of the 16.50 mark.
Turning to the week at hand, investors will be keeping an eye on the bond market and the yield curve in particular. The yield on the benchmark 10-year Treasury note finished Friday at its lowest level in 2019. There are worries about the global and domestic economies, and we will get a number of important reports on the latter over the next five days. We will receive data on housing starts, consumer confidence, the trade gap, personal income and spending, and new home sales. The week ahead also will bring the final revision to the fourth-quarter 2018 GDP estimate.
With less than an hour to go before the commencement of the new trading week stateside, the equity futures are indicating a lower opening for the U.S. stock market. So far overseas, the performance has been a sea of red ink for the international stock markets. The main indexes in Asia finished lower overnight, while the major European bourses are modestly in negative territory as trading moves into the second half of the session on the Continent. Meantime, investors also will be looking at Apple (AAPL – Free Apple Stock Report) today, as the technology giant is expected to continue its campaign to try and convince investors that its future is in services rather than hardware. The tech behemoth is likely to unveil two new offerings, a video streaming service and news subscription platform, at a special event held by the company.
– William G. Ferguson
