THE MONTH IN BRIEF
December 2018 will be remembered for its volatility and its challenges. The S&P 500 flirted with bear market territory, dropping 10.16% for the month. Appetite for risk declined here and abroad in the face of tariffs, concerns about the Federal Reserve raising interest rates too quickly, a federal government shutdown, and questions about the Brexit. It was also a difficult month for commodities. In contrast, Main Street seemed in good shape: low unemployment, high consumer confidence, and strong consumer spending were all evident.1
DOMESTIC ECONOMIC HEALTH
While the Federal Reserve certainly pays attention to Wall Street’s mood, it adjusts its monetary policy in respect to the economy, not the preferences of market participants. In December, the central bank did not exactly tell investors what they wanted to hear. Following the announcement of another quarter-point rate hike (the target range is now 2.25-2.5%), Fed chair Jerome Powell stated that monetary policy “does not need to be accommodative,” and affirmed that the Fed would continue to remove up to $50 billion per month of Treasury and mortgage-backed securities from its balance sheet. According to the latest Fed dot-plot, there would be no pause in tightening: two rate hikes were still envisioned for 2019. Major indices fell sharply after Powell’s remarks.2
To justify its stance, the Fed could point to a number of economic indicators. The manufacturing and service sectors were seeing considerable expansion, by the look of the Institute for Supply Management’s November purchasing manager indices. ISM’s non-manufacturing PMI rose 0.4 points to 60.7, and its factory PMI climbed 1.6 points to 59.3; these were great readings. (Additionally, the Federal Reserve said that industrial production rose 0.6% in November.) Department of Commerce data showed personal spending up 0.4% in October and retail sales advancing a decent 0.2%. Consumer confidence remained high. The University of Michigan’s index finished December at 98.3, higher than its final November mark of 97.5. The Conference Board’s monthly gauge came in at 128.1 – notably below its (revised) November reading of 136.4, but still at an impressive level.3,4
