Key points from AIM’s January 2019 market commentary

December ended up being the worst month for equity markets since the Great Depression, with the S&P 500® Index down over 9%.

The Fed’s prescription of fewer rate hikes in the forecast for 2019 wasn’t enough to cure the latest head cold in the markets as risk assets performed poorly throughout the month of December. Equity markets had one of the worst Decembers on record, with the S&P 500® Index logging a negative 9.18% decline for the month. Partisan politics played a role in the equity weakness as politicians could not come to an agreement on a spending bill.  The main contention remains the funding for a border wall and without the passage of a spending bill, the government will remain in a partial shutdown. This was just another layer of uncertainty investors had to contemplate as they navigated through a difficult final month of the year.

Jittery investors began to price in increased recession risks as growth uncertainties continued to pile on.

The narrative around slowing growth has caught the full attention of market participants as asset prices have been ultrasensitive to any market signals of a slowdown in activity. Driving the growth slowdown fears has been an expanding list of uncertainties including tariffs with China, Fed rate hikes, declining corporate profits, and the latest government shutdown. While it’s normal to see turbulent markets as psychological fears of an impending recession take hold, the risk-off sentiment appears to have gotten ahead of itself.

The Fed overlooked calls for a pause in rate hikes and lifted the policy rate to a range of 2.25%-2.50%.

The Fed’s prescription of fewer rate hikes in the forecast for 2019 wasn’t enough to cure the latest head cold in the markets as risk assets performed poorly throughout the month of December. The weakness in equities combined with the shallower path of rate hikes projected by the Fed has weighed heavily on rates, and the yield curve continued to flatten. As such, the yield on the 10-year Treasury fell all the way down to 2.54% on the first trading day of the new year and moved closer to inversion with the 3-month yield. Since the beginning of the latest equity rout in October, we have witnessed yields on both 10- and 30-year Treasuries drop nearly 70 basis points on volatility and growth concerns. Ultimately, investors began to ask themselves if the Fed will eventually take notice.

Solid labor market data helped reassure investors the economy is not on the brink of a recession.

Market sentiment appeared exhausted following a string of negative headlines which included weaker manufacturing data, a surprise pre-announcement of weaker sales from Apple, and a continued government shutdown. Nonetheless, markets were finally able to shake off the latest cold as a blowout employment report helped reassure market participants that the economy is still performing quite well. Markets often tend to swing too far in one direction, and pricing in rate cuts was likely the tipping point as the solid labor market data helped stabilize equity markets and lift bond yields closer to reasonable levels.

Get the full January 2019 Market Update here.

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