The Economic Holiday Wrap-Up 2018

The Economic Holiday Wrap-Up 2018

A look back at 2018 thus far

12/19/2018
economic review

The year in brief. Last December, market prognosticators polled by Barron’s forecast a 7% advance for the S&P 500 in 2018. That prediction may come true. By early November, the S&P was up only about 5% for the year. Wall Street began 2018 in rally mode: happy to see large tax cuts for corporations, anxious to see whether a booming economy would lead to rising inflation pressure and recurring interest rate hikes. What Wall Street did not see coming late in 2017 were the 2018 trade wars involving the U.S., China, Canada, and the European Union; appreciable headwinds emerged as punitive tariffs were placed on various imports. The fundamentals of the economy remained strong, but bulls faced challenges as the year proceeded.^1,2
 
Domestic economic health. If the economic recovery from the Great Recession was not at its peak in 2018, it certainly seemed close. After expanding at a middling 2.2% pace in the first quarter, the economy grew 4.2% in Q2 and 3.5% in Q3. (That Q2 GDP reading was the best in nearly four years.)³

The ranks of the unemployed thinned further. The headline jobless rate dipped below 4% in the first half of the year, then declined from 4.0% to 3.7% across the five months ending in October. The U-6 rate, tracking the unemployed plus the underemployed, was 8.0% when 2017 ended; ten months later, it was down at 7.0%.^4,5

Personal spending data also affirmed the strength of the economy. In the first three quarters of the year, it contracted just once (0.1% in February). From March through September, consumer spending rose 0.4% or better every month.⁶

Households were especially confident in 2018, as the two most well-regarded monthly consumer sentiment indices pointed out. During the first ten months of the year, the University of Michigan’s index topped 100 twice (March, September) and fell below 96 only once (January); its historical average reading is 86.4. The Conference Board’s monthly gauge has been trending upward ever since a slight dip to 111.6 at the start of 2017; it spent the first ten months of 2018 climbing from 125.4 to 137.9, indicating widespread optimism.^7,8

A look at the Institute for Supply Management’s purchasing manager indices for the service and factory sectors shows an economy running on all cylinders in 2018. These two indices, watched worldwide, indicate sector growth when they are above 50 and sector contraction when they are below 50. ISM’s factory PMI hit a remarkable peak of 61.3 in August, and in October, it was at 57.7 (actually, its second-lowest mark of the year). ISM’s service sector reached a record 61.6 in September and came in at 60.3 for October; its YTD low was 55.7 in July.^9,10

The 10-year Treasury yield hit 3.0% on April 24, and in the fall, it drifted between 3.0%-3.3%. The federal government’s Consumer Price Index showed yearly inflation at 2.1% in January; in June and July, it reached 2.9%. By September, however, falling fuel costs had helped moderate annualized inflation to a rate of 2.3%.^11,12

2018 was a year of major tariffs, instituted mainly in spring and summer. June 1 saw the U.S. put tariffs and quotas on $48 billion of metals imports from Canada, Mexico, and the European Union. A month later, America put $50 billion in tariffs on assorted Chinese imports, triggering an import tax response on American goods by the P.R.C. ($50 billion in immediate response and an additional $60 billion in August). It was also a year in which a major trade pact started to come together: the United States-Mexico-Canada Agreement (USMCA), informally referred to as NAFTA 2.0. It could be in place by early 2019, if approved by the legislative bodies of all three nations. The accord could bring more manufacturing jobs to America, especially in the auto industry.^13,14

In November, the federal funds rate was between 2.00% and 2.25%, a percentage point higher than it was a year earlier. The Federal Reserve, now in the Jerome Powell era, was widely expected to make its fourth quarter-point hike of 2018 in December.^2,15
 
Global economic health. 2018 may be remembered as a year of deceleration for key economies outside North America. By October, China was on pace for 6.5% annual growth, and its Q3 growth pace of 1.6% represented its weakest quarter in nearly a decade. The nation’s export orders declined to a low unseen since early 2016 as fall started, and the nation’s powerful manufacturing sector was nearly contracting. The yuan also slipped to its weakest level since 2008 versus the dollar.^16,17

While euro area joblessness was at a 10-year low of 8.1% at the end of the third quarter, the rate of economic expansion halved in the European Union during the same three months, with consumer inflation ticking up from 2.1% to 2.2% as the fourth quarter began. The European Central Bank announced plans in December to conclude its long-running economic stimulus.^17,18
 
World markets. On the whole, our stock indices fared much better than their peers overseas. In early November, nearly every consequential European index was in the red, YTD. The Stoxx Europe 600 was down 6.8%. France’s CAC 40 was 4.5% lower on the year; Germany’s DAX, 11.1%. Italy’s FTSE MIB was down 11.8% YTD; Spain’s IBEX 35, 10.5%; United Kingdom’s FTSE 100, 8.4%. India’s Sensex was the only Asia-Pacific index displaying a YTD gain, an advance of 2.7%. South Korea’s Kospi had slumped 15.3% for the year; the Philippines’ PSEi, 16.1%; Hong Kong’s Hang Seng, 12.7%; China’s Shanghai Composite, 19.6%. Australia’s All Ordinaries was off just 3.4% for the year, and Japan’s Nikkei 225, only 2.7%. Canada’s TSX Composite and Mexico’s IPC All-Share were respectively 5.7% and 6.1% lower for the year in early November. Bucking the global trend, Brazil’s Bovespa was up 16.1% YTD, and Argentina’s Merval had posted a 3.0% YTD advance.¹⁹
 
Commodities markets. The U.S. Dollar Index had gained 5.5% for the year through early November, and that dollar strength was among the factors weighing on commodity performance during 2018. In the second market week of November, gold had lost 7.9% for the year to fall to $1,227.40 on the COMEX; silver, 16.6% to $14.56. Copper was down 18.1% YTD and platinum, 8.2% YTD. Palladium was an exception, posting a 7.1% YTD improvement. WTI crude displayed a 6.0% YTD advance through early November with a value above $61 a barrel on the NYMEX. Natural gas emerged as one of 2018’s best performers, up 17.7% for the year during the first full market week of November. Simultaneously, cocoa stood out among the softs with a 22.8% YTD gain; cotton was up 6.0% YTD. Unfortunately, sugar and coffee were respectively 17.1% and 15.4% lower on the year.^2,20
 
Real estate. Expectations of sellers and buyers differed in 2018, and that difference affected the pace of existing home sales. Prospective buyers found few affordable properties and went to the sidelines; sellers waited a little longer for their homes to move. Resales declined 4.1% over the 12 months ending in September, by the estimation of the National Association of Realtors. Additionally, mortgage rates approached 5% in the fall: the average rate on a 30-year home loan, according to Freddie Mac, was 4.83% on November 1. That compares with 3.95% on January 4.^21,22

New home sales also cooled. They were down 13.2% year-over-year through September, according to Census Bureau data. Even so, residential construction activity did not exactly taper off during this time: another Census Bureau report shows a 3.7%, 12-month rise for housing starts through September, albeit a 1.0% slump for building permits.^23,24
 
Looking back, looking forward. This year marked the return of significant volatility. The S&P 500 has seen two corrections (February, October), yet it also reached all-time peaks (at this writing, its last record close was on September 20). While the residential real estate market is showing signs of weakness, other economic gauges are still strong, which gives investors something to be bullish about for the holidays. At this writing, 2018 will likely be remembered as a slightly subpar year for equities, but who knows – this very old bull market might just gain some fresh legs as we proceed toward 2019.²⁵