American Consequences - January 2019



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ONE OF THEWORST MONTHS SINCE THE GREAT DEPRESSION... December 2018 was a miserable month for global equities. The S&P 500 was off as much as 12.5% and the index closed out the year down 6%. Volatility was also high, leading to a 660-point drop on Christmas Eve followed by a 1,080-point surge on December 26. The November election results were not fully felt in the markets until about mid- December. The fact that the House was going to flip Democratic was not a surprise, but the timing could not have been worse. The U.S. was well into a chaotic economic cycle and global growth was slowing. Some hoped that a divided congress would make it easier to compromise on must-pass stimulus and budget bills, but the government shutdown and Mexican border wall impasse shattered that notion. Investors in late 2018 were overwhelmed by prolonged economic turmoil and political battles. There was no movement on China trade and tariff talks... Chinese imports trickled in, retail sales collapsed, and the government clamped down on the shadow banking sector. The White House trade team was mixed in their message, and investors continued to pound Chinese shares. As a result, global technology stocks suffered, particularly the FAANG trade (Facebook, Apple, Amazon, Netflix, and Google) and Apple’s supply chain.

Across the Atlantic, Brexit concerns roiled the UK and EU markets. UK Prime Minister Theresa May survived one no confidence vote in mid-December, but a January 15 Brexit vote ended in disaster, and a second no confidence vote is being discussed. Italy continued to wrestle with its budget deficit plan, causing local interest rates to spike. And France saw month-long protests over its gasoline tax. Overall, Europe’s manufacturing sector and exports were impacted the most. Other big concerns were the plunge in oil prices, the outsized sell-off in small cap stocks, and that corporate debt had soared to its highest level in modern history. The crude sell-off was a function continued conflict with Iran, higher U.S. output levels, and the global growth skid. Small caps faltered because of higher labor and material costs and a leveling out of the previous year’s tax cut benefits. Meanwhile, ballooning corporate debt looms as companies begin to refinance in the face of rising rates. It was a perfect storm for the worst monthly loss since the Great Depression. Investors fear that a recession is already taking hold in Europe and that the spillover will cause the same problems in China and emerging markets. And despite continued growth in the U.S. economy, the effects of uncertainties like the U.S. government shutdown and the Brexit- EU conflict have bled beyond their borders.

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January 2019

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