Concerns over a slowing economy and trade wars drove stocks sharply lower in the first half of the week. Even with up days yesterday and today, both major indices closed down on the week, with the Dow declining 2.2% while the S&P 500 declined 1.6%. As you might guess, the rallies yesterday and today came on the heels of positive Chinese trade talk from the Trump administration.
Economic growth has been strong over the last four quarters, but some are starting to question the longevity of this stretch. Increased federal spending has added to the growth and investors are starting to worry that other areas of the economy are slowing. Roughly speaking, the consumer spending makes up two-thirds of the US economy while business investment and government spending each add 15-20%. When the government runs large deficits, it serves as a stimulus to the economy and can mask some weakness in other areas. While the past data has been good, some companies are tempering expectations heading into 2019. Given weakness in some other parts of the world, this will be an important development to follow.
Oil decreased again this week, declining 5.7% to close at $56.83/barrel. The sharp drop in oil prices supports the view that overall economic growth is slowing. While oil is volatile and often swings too high and too low, it’s eye-opening to see it decline over 25% in the last six weeks. The yield on the 10-yr Treasury moved lower, closing at 3.07% from 3.19% last week. The average rate on a 30-yr fixed rate mortgage held steady at 4.94%.