As the end of the year approaches it would take a minor miracle of sorts to turn around a dismal performance for equity markets in December. The S&P 500 has fallen by just over 12% year to date, but this performance is somewhat better than that of equity markets elsewhere around the world. Meanwhile 10 year US Treasury yields have dropped by over 53 basis points from their high in early November.
A host of factors are weighing on markets including the US government shutdown, President Trump’s criticism of Fed policy, ongoing trade concerns, worries about a loss of US growth momentum, slowing Chinese growth, higher US rates, etc, etc. The fact that the Fed maintained its stance towards hiking rates and balance sheet contraction at the last FOMC meeting has also weighed on markets.
A statement from US Treasury Secretary Mnuchin attempting to reassure markets about liquidity conditions among US banks didn’t help matters, especially as liquidity concerns were among the least of market concerns. Drawing attention to liquidity may have only moved it higher up the list of focal points for markets.
The other major mover is oil prices, which have dropped even more sharply than other asset classes. Brent crude has dropped by over 40% since its high on 3 October 2018. This has helped to dampen inflationary expectations as well as helping large oil importers such as India. However, while part of the reason for its drop has been still robust supply, worries about global growth are also weighing on the outlook for oil.
But its not all bad news and markets should look at the silver lining on the dark clouds overhanging markets. The Fed has become somewhat more dovish in its rhetoric and its forecasts for further rate hikes. US growth data is not weak and there is still sufficient stimulus in the pipeline to keep the economy on a reasonably firm growth path in the next few months. Separately lower oil is a positive for global growth.
There are also constructive signs on the trade front, with both US and China appearing to show more willingness to arrive at a deal. In particular, China appears to be backing down on its technology advancement that as core to its “Made In China 2025” policy. This is something that it at the core of US administration hawks’ demands and any sign of appeasement on this front could bode well for an eventual deal.