FED RAISES RATES: The Federal Reserve raised its benchmark interest rate another quarter of a percent on Wednesday. The Fed made it clear that it intends to continue raising rates next year. Fed chair Jerome Powell emphasized the continued strength of U.S. economic growth despite the recent strains caused by weaker growth in Europe and China and the downturn in stock prices. “We think this move was appropriate for what is a very healthy economy,” said Mr. Powell. The Fed has now raised rates for five consecutive quarters. “Over the past year, the economy has been growing at a strong pace, the unemployment rate has been near record lows and inflation has been low and stable….All of those things remain true today.”
LEADING ECONOMIC INDICATORS STILL RISING: This headline may seem incongruous to what is going on in the markets. The Conference Board’s Leading Economic Index increased 0.2% in November. Although the pace of increase has slowed somewhat, the strength in the leading indicators has been widespread. With slowing of growth, this seems to indicate that growth may moderate. The data tracked by this index, and the history of the index itself, do not indicate a recession any time soon. (Past performance of any data is never a guarantee of future performance of course.)
CONSUMERS STILL SPENDING BUT BUSINESS SPENDING IS SOMEWHAT MUTED: Personal consumption expenditures in the U.S. rose 0.4% in November from the prior month, the ninth straight monthly increase. Falling gasoline prices helped. Purchases for durable goods rose 0.8% in November, but if you exclude military spending (there were a lot of aircraft purchases), such orders decreased 0.1%, the third decline in a row. Orders for machinery, electric equipment and motor vehicles and parts all fell in November as did nondefense capital goods (excluding aircraft), a common gauge of underlying business investment. This all seems to indicate confident consumers (who primarily drive overall U.S. economic health) and more guarded businesses. Consumers see higher wages and lower unemployment while it is the businesses, especially the larger ones, who pay attention to global economics and trade tensions.
TECH STOCKS LEAD A GENERAL MARKET ROUT: There is no sugar coating it: Last week was a very poor week in the U.S. stock markets. We are on track for the worst month in U.S. stock performance since 2008. Tech stocks have led the selloff that began in late August. Since that time, Facebook, Amazon, Apple, Netflix, and Alphabet (Google’s parent) have lost $1.2 trillion in value. These stocks were down more than 5% on Friday. The general losses seem to be caused by the fear of slowing economic U.S. growth next year and the possibility of recession. This week the general negative attitude was assisted by the latest increase in interest rates by the Fed. When you add the looming government shutdown, the end result was ugly.
THE ECONOMIC WEEK AHEAD: This should be a quiet week economically. The government shutdown will likely dominate the news, but there will be little in the way of new economic data in the U.S., Europe or China, and trading will likely be light.