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Equities: Sometimes the herd goes over a cliff
The one major set of indicators that had a negative image of the immediate future for the US economy were the equity averages. The S&P 500, the Dow and the NASDAQ were all negative for the year by mid-December having lost all of their 2018 gains since October.  Despite the losses all remained substantially higher from their early 2016 lows. The S&P for instance closed at 2,416.62 on December 21st 34% above its February 11, 2016 low.

Equities can price as a discount for future economic activity. In the long run stocks rise because the economy expands.  But in shorter time frames, especially at year end after a tremendous two year rally, profit is the prime motive.

The late fall sell-off in the US and around the world had more to do with the global economic and trade concerns than with specific US economic topics. Those worries were a catalyst for the rapid decline in the equity averages. The proximity to the end of the year and the desire of managers to preserve positive returns also played a heavy part in the volatility of the selling.

Stocks do have a feedback loop to the US economy which over time can impact economic performance. As prices fall the investor class is less wealthy and less inclined to spend.  If the sell-off becomes a bear market, generally considered 20% from recent highs, then the pessimism of the market can infect the overall economy, postponing or eliminating consumption and investment. Magnified and repeated through the media this pessimism can act as a retardant on growth. 

Credit Markets: The adult in the room
One of the surprises of the year has been the resiliency of the bond market. Throughout most of the year as the Fed projected the Fed Funds to 3% and beyond the benchmark 10-year Treasury was assumed to be headed back to more historical range above 3.5%. In October and early November it looked possible with the yield reaching 3.25% and above several times.

By the second week in November prices had reversed sharply driven higher by the combination of equity declines, global trade, economic growth concerns and the evident shifting of Fed policy. The yield on the generic 10-year Treasury had fallen 51 points to 2.75% by December 19th. 



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