Market Corner – The Year in Review by Filippo Lecchini
As a new year begin, it’s time to look back and think of the year that was. 2018 was eventful for the markets and the economy. Like all years are, we are going to spend a little time going through the more significant developments, as we remember them and with no pretense of completeness.
The year started on a positive note with the market opening twenty-two handles over where it closed on Dec 29th. By January 3rd the S&P500 passed the 2,700 level, by January 17th it closed above 2,800. This happened despite the fact that a Government shutdown was looming large. Congress at that point had been passing several temporary measures that required to be renewed multiple times. On January 20th finally, the shutdown became unavoidable even though the situation was resolved within a few days.
With up and down days, the market remained above 2,800 for a couple of weeks. Then came February 2nd The equities market had the first big downward move for the year and shed 2% from the previous close. Monday February 5th unfortunately did not look better, and the free fall continued from 2,762 to 2,648. A 4% move, certainly material but not comparable to the spike in the CBOE Options Volatility Index (VIX) that in no time went from 17.31 to 37.32 recording a close to close move of 116%, with an intraday high of 38.80. Contrary to other unexpected moves , the ripples of this one continued for quite some time. Some firms ceased activity, others were hit with material losses and some VIX leveraged ETFs were delisted following dramatic shortfalls.
The return of volatility appeared short lived and within a few weeks everything appeared to be back on the same track. The Federal Reserve met and raised interest rates kicking off a new round of hikes for the year under the leadership of the new Chairman of the Board Jerome Powell. Elsewhere in the markets an interesting trend appeared to be developing in the energy sector where the crude oil rally after a few months seemed to show some conviction. In Europe Germany finally had a new government, after months of post electoral uncertainty, while Italy after an inconclusive consultation struggled to find a governing majority.
Cocoa made new highs after rallying hard in the first quarter. Trade talks had been ongoing for quite some time at this point, particularly with respect to NAFTA. Around this time the negotiations appeared to turn sour. Alcoa in the equities market hit the $60 level because of a new round of sanctions on Russia as Rusal, the world second biggest producer, appeared to be cut out of the international markets. The rally eventually reversed course. On April 18th the movie Black Panther was shown in Saudi Arabia, the first movie shown at a movie theatre in 35 years.
The United States pulled out of the Iran Nuclear Deal. With oil prices already higher for the year that just seemed to reinforce the trend. In Singapore the third derivatives exchanges, the Asia Pacific Exchange (APEX), opened for business with a new palm oil futures contract. The Italian parliament finally found a majority to form a Government. The US announced that tariffs on steel and aluminum will be extended to include EU, Mexico and Canada.
On June 12th President Trump and Kim Jong Un met in Singapore. The Federal Reserve Board voted to increase rates for the second time in 2018. Mexico reciprocated and imposed tariffs on US exports. US unemployment at 3.8%, lowest since 2000. AT&T’s takeover of Time Warner got approval. The Soccer World Cup started in Russia while in Saudi Arabia the ban on women driving was lifted.
Lithuania joined the OECD. Facebook crashed on earnings closing down $40, almost 20%. The largest single day loss in corporate history by market value. Canada’s retaliatory tariffs went into effect. France won the FIFA World Cup.
August 17th marked a multiyear low for coffee and sugar, the downward trend will continue for the rest of the year. These two were some of the most affected commodities selling off in response to an emerging market crisis that began with the Turkish Lira’s collapse. The move was triggered by tariffs disputes between Turkey and the US. On August 2nd Apple became the first public company in the world with a market capital of one trillion dollar. US growth for the second quarter 2018 was reviewed up to 4.2%. The S&P500 closed above 2900 for the first time on August 29th.
Amazon became the second trillion-dollar company. Hurricane Florence brought flooding and damage in the Carolinas, on the US East Coast. The Federal Reserve met and decided for a third 2018 rate increase. Up to that point nothing was really uncertain but once the FED moved three times for the year the question of whether more rate hikes were to be expected definitely gained new attention and priority for the markets as well as the general public. The oil rally raged on with some new highs in equities as well. The other looming concern was the September 30th deadline for the US Government budget and possible revision of the debt ceiling. With the midterm elections on the horizon a short-term deal on funding was agreed upon.
Later than usual, September has a reputation for being historically the worst month for the stock market, October brought back volatility and after hitting a high of 2925 on October 3rd the S&P traded almost 300 points lower toward the end of the month. Remarkable was the drop on October 10th for almost 100 points. As the mood was clearly turning,other products were affected. Crude Oil hit a multi years high at the beginning of the month (nearly $87 for Brent and just under $77 for US Crude) to reverse course and enter a bear market within weeks. Crypto currencies, the highest-flying assets in 2017, after a lackluster but ultimately downward action throughout 2018 saw an acceleration in losses that continued for the whole quarter. The US, Canada and Mexico agreed on a new trade agreement intended to replace NAFTA. Hurricane Michael made landfall in Florida with some area experiencing catastrophic consequences.
While the magnitude of the selloffs was maybe not as pronounced, the environment remained very similar to October’s. Concerns about tariffs and uncertainty about the FED’s path remained in focus. Toward the end of the month concerns about rates eased at least partially as it appeared that “neutrality” (i.e. no more hikes) might be in sight. The midterm elections strengthened the republican control of the Senate, but the House went to the Democrats by a large margin (40 seats gains at the time of writing). The election did not seem to have any particular effect on the market.
Hopes of a resolution for the trade disputes between China and the US brought some positive action to the equities market even though no final decision was imminent. The FED met on the 19th to raise rates for the 4th time in 2018, with the disappointment of those who were hoping for a pause at least. The tone in the statement was however more positive and while further hikes were not dismissed, it appeared that two more at most in 2019 could be enough. On December 21st the Government entered a shutdown that at the time of writing is already the second longest in history, just a few days away from the first spot. For the first time since the final crisis the equities market closed down for the year.
The new split US Congress with the Democrats controlling the House of Representative will be inaugurated in January 2019: Changes are expected to have a significant impact on the second part of President Trump’s first term in a number of ways. Tariffs and interest rates will keep centerstage in the near term and any developments are guaranteed to impact the markets immediately and eventually the economy.
Happy New Year from Phillip Capital.
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