U.S. equity benchmarks all moved lower by at least 6.87% in a turbulent week.
The small-cap tracking Russell 2000 led to the downside with a loss of 8.46%.1
The S&P 500 was down over 7% while the Nasdaq was -8.36%.1
S&P 500 sub-sectors were all negative last week.
Utilities were down the least with a loss of -5.43%.1
Energy led to the downside at -9.63%.1
The CBOE Volatility Index (VIX) gained over 39% to end the week at 30.11.1
US Treasury yields moved lower across the maturity curve in risk-off trading last week.1
The yield curve flattened further as longer maturity yields declined the most.
Foreign bond yields were broadly lower in Europe & Asia.1
Commodities as an aggregate asset class lost almost 6.5% last week.1
WTI Crude closed at $45.59, down 10.95%.1
Gold gained 1.35%.1
The US Dollar index was down.1
In our opinion, U.S. economic data was slightly negative vs. expectations on the week.
The US Trade Deficit increased notably in the most recent data.1
Revised 3rd quarter GDP declined to 3.4%.1
Existing home sales in November rose for the first time in 3 months.1
An index of equities outside the U.S. (MSCI EAFE) was down albeit much less than its US peers.1
US equity indices accelerated to the downside as the S&P 500 experienced its worst week since 2011.
We believe the general uncertainty surrounding various aspects of the global economy including US monetary policy were the major drivers of the recent extreme sell-off.
The small-cap Russell 2000 was down over 8% and is now down 25% from its summer high.2
In our opinion, large institutional investors have likely been using short exposure in small-caps to hedge against rising market risks.
We believe this might have enhanced the recent sell-off.
S&P 500 sub-sectors were all lower on the week as there was nowhere to hide in US equities.2
Even the defensive Utilities sector was down over 5% last week2 as markets seemed to go into full-scale liquidation mode.
Energy was down almost 10% and most sectors were down over 7%.2
The Energy sector is now down to levels not seen since 2016.2
All eyes seemed to be on the US Federal Reserve last week.
As expected, the Fed raised interest rates 0.25% while modestly bringing down its guidance for 2019 and beyond.2
We believe Fed Chair Powell failed to reignite risk appetite for stocks by stating the Fed’s policy regarding their balance sheet reduction moving forward is on “auto-pilot.”
Despite the initial panic within the equity markets, we think this was a largely a dovish pivot by the Federal Reserve.
The US Dollar weakened last week and ended down 0.40%.2
Often times, in severe risk-off environments, the US Dollar has been known to strengthen.
In our opinion, the market could be in the early stages of pricing in both a rising fiscal and trade deficit.
A so called “twin deficit” combined with marginal economic weakness has been tied to currency weakness at various times throughout history.
2018 saw the largest issuance of US Government securities as a share of GDP since WW2.2
Next year’s issuance is projected to be even larger.2
In our opinion, foreign entities haven’t been the largest buyers as a result of the increased costs of hedging their currencies and US corporations have picked up the slack due to the dynamics of the recent US gov’t stimulus package.
We believe that as a result of these facts, we will most likely see rates eventually move higher OR the US Dollar move lower.
Ryan A. Mumy, CFP®, AIF®
Chief Investment Officer
Contact:828/855-9400 or info@CIASonline.comor firstname.lastname@example.org
 Source: Bloomberg – 12/21/2018
 Source: Bloomberg – 12/21/2018