Investor weariness about trade talks, the Federal Reserve, a government shutdown, and global economic growth lingered into the New Year.
Despite the turbulent end to 2018, the U.S. economy continues to be resilient into 2019. Unemployment is at its lowest level in 49 years, wage growth is reaching levels not seen since 2009, and consumer spending and industrial production remain strong. A tight labor market and moderate inflation has been good for consumers.
The year-end climate heading into 2019 was made all the more challenging as equity markets negatively reacted to another rate hike in December and news of two more expected hikes in 2019. Ironically, the market views the Fed hikes as a validation by the Fed that U.S. economic activity is healthy enough to endure further rate increases.
Global equity markets ended 2018 in negative territory; nearly every major index in both developed and emerging markets fell. China’s stock market was among the worst performer internationally as trade tensions took a toll on Chinese manufacturers and exporters. U.S. stock markets experienced a level of volatility not seen in several years, resulting in a pullback for all major domestic equity indices in 2018.
Ongoing trade disputes and new tariffs negatively influenced the markets and economic projections throughout year. Relations with China were forefront as the administration negotiated trade terms intended to better protect U.S. intellectual property and disparate tariffs.
Sagging oil prices
Growing U.S. oil production and an increase in supplies led to a drop of U.S. oil prices by 25% in 2018. The benchmark for U.S. oil, West Texas Intermediate (WTI), fell from $60 per barrel in the beginning of the year to $45 per barrel by year-end, simultaneously reducing the price of gasoline nationwide.
Fed yield curve tracker
According to the Federal Reserve Bank of New York, the likelihood of a recession remains relatively low with a yield curve that shows a 21% probability that one will occur within the next 12 months (last updated January 9, 2019 with data through December). Although up from 15% in November 2018, the Fed has historically seen greater than 30% probabilities before each of the last seven recessions since 1970.
Sources: Federal Reserve Bank of New York, Treasury, Labor Dept., Bloomberg
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