January 23, 2019

Financial Markets

  • Major U.S. equity indices dropped sharply on concerns over slowing growth, increasing pressure on margins, global trade tension, and tightening monetary conditions despite robust economic and corporate earnings reports. Earnings for the S&P 500 were up over 25% in the third quarter.  Developed international equity markets also had sizeable declines on slowing growth worries.  Emerging markets (EM) returns varied widely by region, with some countries posting gains, resulting in the MSCI EM index outperforming developed market indices.
  • S. Treasury bond yields rose to multi-year highs on expectations for tighter monetary policy in the future before declining late in the quarter on safe haven trading.
  • Crude oil prices dropped from the mid-$70s to the mid-$40s due to too much supply.

Overview of the Economy

  • S. gross domestic product (GDP) rose 3.4% for the third quarter as the economic expansion in the U.S. continues with improvements in manufacturing and service sector activity, retail sales, and the labor market. Data from China weakened and the government implemented more fiscal stimulus and credit easing moves.  Data from Germany also weakened with a drop in industrial production and negative GDP growth.  Japan also had negative GDP growth in the third quarter.

Notable Events

  • The U.S. Federal Reserve Open Market Committee (FOMC) raised the federal funds rate target by 0.25% and indicated a continued gradual pace for future interest rate hikes and balance sheet reduction.
  • President Trump and China’s President Xi agreed to a trade war ceasefire including holding off on new tariffs for 90 days, China agreeing to buy a significant amount of U.S. goods, and new talks on structural changes scheduled.