2018 was a year peppered with consequential world events, investigations and YES, LOTS OF TWEETS, contributing to uncertainty and volatility in the financial markets. Despite the relatively strong economy and job growth numbers in the US, it’s clear that investors were and are still on edge about future events and are approaching the markets with caution. Some analysts and economists are even warning of another recession soon. The markets hate uncertainty as proven by the effects that trade war tensions, NAFTA/ USMCA negotiations, Brexit talks, rising interest rates etc. had. Many of these issues are ongoing and remains unresolved so we can expect to see continued market volatility into 2019. Let’s review some of the consequential events and Financial highlights of 2018.
TRADE TENSIONS BETWEEN US/CHINA
The ongoing trade disputes between China and the US contributed significantly to market volatility. There are signs that the dispute is beginning to affect the profitability of many corporations and it is starting to spill over into the stock market. Tariffs are hurting business confidence and corporate profits on both ends, which could eventually lead to job losses. At the very least, an increase in tariffs will make imported goods more expensive. Those higher prices will either be passed on directly to consumers or they will be absorbed by the companies buying or importing those products. RETAILERS HAVE WARNED that tariffs threaten the retail industry, as either consumers will have to pay more, or retail margins will be lower due to cost absorption. Another possibility is that consumers will simply buy fewer products.
This ongoing trade war is not good for the economy and is negatively impacting business, investor and consumer confidence. Furthermore, the much-anticipated meeting at the G-20 summit in Argentina between President Trump and President Xi Jinping failed to address the uncertainty and fears, as no agreement was reached. Instead the deadline for a resolution was extended by another 90 days. The markets responded negatively to the lack of a tangible solution. Both parties still seem miles apart in terms of their proposals and expectations.
Some economists are of the view that the fallout from the trade war tariffs will have a relatively minor effect on the US economy. They argue that to date while certain industries are being hurt the overall aggregate economic impact will be limited. However, with the threat of higher tariffs and further escalation a real possibility this will only fuel more fear, uncertainty and volatility in the markets.
NAFTA / USMCA NEGOTIATIONS
Negotiations between US, Canada and Mexico for a new NAFTA now USMCA deal also had major effects on the markets. The markets wanted a deal, they wanted certainty. Once an agreement was reached, stock markets rallied with the news. NAFTA was a long-standing agreement since January 1st, 1994 which got rid of barriers to trade and investments between the 3 countries. The Trump administration aggressively pushed for changes more in line with his “America First” policy. He threatened to dismantle the agreement in its entirety if necessary, which made investors nervous. A trade deal was eventually reached and rebranded under the USMCA (United States, Mexico, Canada agreement) However the tariffs on steel and aluminum remains a major contention issue and Canadian prime minister, Justin Trudeau, continues to seek to rectify this issue with President Trump.
Uncertainty about trade in North America coupled with trade tensions with China rattled the markets and although a new NAFTA/USMCA deal was signed it doesn’t go into effect until the elected officials of all 3 nations ratify the deal.
THE MUELLER INVESTIGATION
The Mueller investigation has consumed media airwaves for the past 2 years. While there has been indictments of 25 Russians and individuals close to the president such as Paul Manafort, Michael Flynn, Richard Gates, and Michael Cowan, the president has yet to be directly implicated in any crimes. There are ongoing investigations into possible US Russian collusion, obstruction of justice, campaign violation etc. and no one knows for sure what the future holds. We are increasingly hearing the IMPEACHMENT word thrown around, however there are arguments for and against the likelihood of that happening. There are also debates re whether a sitting president can be indicted. Until the investigation is fully wrapped up and the findings presented, there will continue to be some anxiety and uncertainty around this matter.
BITCOIN’S MASSIVE PRICE CRASH
One of the biggest stories of 2018 is Bitcoin’s massive price crash and the overall crypto market crash. Bitcoin is now down more than 70 percent since the start of 2018. Increased regulatory scrutiny, market manipulation, panic selling and a series of negative cryptocurrency news, contributed to the volatility and fall in the price of Bitcoin. In January 2018 there were speculations that South Korea was preparing to ban cryptocurrency trading. Shortly afterwards a whopping 530 million US dollars was hacked from Japan’s largest cryptocurrency OTC market. By March 2018, tech giants including Facebook, Google and Twitter started banning ads related to initial coin offerings (ICO) and token sales. The Chinese also started cracking down on cryptocurrency exchanges and ICO’s. The delay in the approval of a bitcoin exchange traded fund also contributed to the decline in Bitcoin prices.
According to Coin Market Cap, On December 17, 2017 bitcoin’s price reached its all time high of $19,926.50. As of December 13, 2018, Bitcoin traded as low as $ 3420.98, loosing approximately 83% of its value, from its all-time high value.
US INTEREST RATES HIKE
All eyes are on the Dec 18 – 19 meeting where the feds will decide whether to increase interest rates for the 4th time this year. If rates rise again it could contribute to more market volatility. Economists believe that the Feds will raise interest rate to a range between 2.25% and 2.5%.
President Trump, who sees another rate hike as a treat to his Economic growth policies has been critical of the feds approach to interest rate increases.
To support their last rate hike in September, the feds suggested that Job gains were strong, unemployment was low, household spending and business investment were strong. They also projected that GDP growth would hit 3.1% in 2018, up from 2.8% projected in June. The feds are essentially trying to slowly cool a potentially overheated economy.
With higher interest rates, bonds start to look more attractive and since they are relatively safer than stocks people may be tempted to sell stocks and buy bonds contributing to stock market fluctuations. Higher borrowing costs also contributes to reduced corporate profits which also affects the stock market
Rate hikes in 2018
• Mar 21, 2018 — 1.50%–1.75%
• Jun 13, 2018 — 1.75%–2.00%
• Sep 26, 2018 — 2.00%–2.25%
All the happenings and uncertainties mentioned above, contributed to a volatile year for the S&P 500. A YTD look at the index shows the price at the start of the year at 2,757.99. As of December 14, the price closed at 2,599.95, it’s lowest point in 8 months. The index has seen a high of 2,930.75. Stocks in the S&P500 index such as General Electric, Goldman Sachs, Electronic Arts, Schlumberger, and Pacific Gas & Electric all hit new 52-week lows on Monday December 10th, even though they span different sectors and industries. Unfavourable news out of China and Europe in December showing weaker than expected economic data also contributed to the sell off.