Last week stocks suffered their worst loss in two years. The S&P 500 Index fell 6.0 percent, as investors worried about a possible trade war, higher interest rates, the privacy of personal data and turnover in Washington. No sector was spared, although energy stocks held up fairly well. That was not the case elsewhere. Technology shares lost more than 7 percent, led by a 14 percent decline in Facebook after disclosure of the misuse of user personal data. Meanwhile, healthcare, materials and industrials each dropped more than 5 percent.
A retest of the early February low was to be expected, and on Friday the S&P 500 close of 2588 came within a shade of the February 8 2581 close, but did hold just above the 200-day moving average of 2585. But the February decline was related more to fears of rising interest rates in the face of economic strength and incipient inflationary pressure. This time, it was the imposition of tariffs and a possible trade war resulting in an economic slowdown that sent investors to the sidelines. These same concerns were manifested in wider credit spreads and a surging VIX volatility index, which rose from 15.8 to 24.9 on the week. The dollar also
resumed its decline after several weeks of stability.
Investors Respond to the Fed
The Federal Reserve raised the overnight rate another quarter point as expected. It was the first Federal Open Market Committee (FOMC) meeting presided over by Jerome Powell, and included updates to the Fed’s projections of economic conditions and expected rate policy. As intimated in the Chair’s recent congressional testimony, the Fed raised its estimate of 2018 GDP growth to 2.7 percent from 2.5, while simultaneously acknowledging that first quarter growth had moderated, and raised the 2019 estimate to 2.4 from 2.1 percent. It also left in place its projection of a total of three rate hikes this year, but the dispersion of individual member estimates edged higher, suggesting that subsequent evidence of firming growth could easily push the 2018 projection to four rate hikes.
The Fed also raised its 2019 estimate from two rate hikes to three, and raised its anticipated terminal rate as well. Importantly, however, although it lowered its forecast of the rate of unemployment, it simultaneously left unchanged at 1.9 percent its 2018 outlook of both headline and core Personal Consumption Expenditures (PCE). The net result was a pullback in bond yields. The ten-year note ended the week at 2.81 percent, down from 2.90 percent before the Fed decision. The two-year fell eight basis points following the Fed’s announcement, ending the week at 2.26 percent.
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