By William Watts, MarketWatch
Another brutal week left the stock market with its worst start
to a December in 38 years, and a meeting of Federal Reserve policy
makers might not offer the relief some investors are pining for
when they conclude a two-day policy meeting on Wednesday, says one
economist.
How bad was it? Stocks ended a week of often whipsaw trading
with a decided move to the downside Friday
(http://www.marketwatch.com/story/us-stock-futures-under-pressure-after-weak-china-data-2018-12-14)
(http://www.marketwatch.com/story/us-stock-futures-under-pressure-after-weak-china-data-2018-12-14).
The Dow Jones Industrial Average dropped nearly 500 points,
leaving it more than 10% below its early October all-time closing
high, meeting a widely used definition of a market correction. It
joined the S&P 500 and the Nasdaq Composite , which were
already in correction mode. The S&P and Dow are negative for
2018, while the Nasdaq is clinging to a 0.1% year-to-date rise.
And it's hardly an auspicious start to a month that's
historically a positive one for equities. Over the first nine
trading days of the month, the Dow is down 5.6%, the S&P is off
5.8% and the Nasdaq is 5.7% in the red. That's the worst start to a
December for all three benchmarks since 1980, according to Dow
Jones Market Data.
That sounds bad, but it probably isn't bad enough to convince
the Fed to pause when it comes to interest-rate rises, said Tom
Porcelli, chief U.S. economist at RBC Capital Markets, in a
note.
See:The Fed's about to embark on a tricky balancing act, with a
rate hike and a dovish message
(http://www.marketwatch.com/story/the-feds-about-to-embark-on-a-tricky-balancing-act-with-a-rate-hike-and-a-dovish-message-2018-12-13)
Remarks by Fed officials, including Jerome Powell, have led some
investors to look for the central bank to potentially end the
rate-hike cycle after delivering a December increase, but Porcelli
argued that still strong economic data meant the debate should be
more focused on the merits of policy makers' expectations for three
or more rises in 2019.
Read:No recession as long as Fed doesn't screw up, award-winning
economist says
(http://www.marketwatch.com/story/no-recession-as-long-as-fed-doesnt-screw-up-award-winning-economist-says-2018-12-12)
And while stock-market volatility has seen a significant uptick,
"equities have not deteriorated enough to warrant a pause,"
Porcelli said, noting that unlike, say, the emerging-market crisis
of 1998 when stocks fell sharply, U.S. equities today are still
basically flat year-to-date when it comes to total returns.
"On that basis, it is also worth pointing out that you cannot
make the case that there is a negative wealth effect at play that
is feeding through to the macro backdrop," he wrote.
Putri Pascually, managing director at PAAMCO, also argued that
investors might be misreading the Fed, noting a "significant
dispersion" between the Federal Open Market Committee's projections
on future rate hikes and market expectations.
"If the Fed, focused on a tight labor market and wage increases,
continues on its hiking path, don't bet on fundamentals to save the
day," Pascually said, in a note. "Positive growth on a global basis
may not be sufficient to overcome broad based revaluation of risky
assets. Macro risks such as a trade war and a hard Brexit continue
to add to the ledger of risks."
Investors will be glued to the Fed's policy statement, remarks
by Powell, and, of course, those rate projections by Federal Open
Market Committee members.
Friday's stock-market selloff was tied to weaker-than-expected
economic data out of China and the eurozone, which appeared to
offset growing optimism that Washington and Beijing will manage to
make progress toward smoothing over trade tensions.
Meanwhile, U.S. economic data was strong, with November retail
sales data
(http://www.marketwatch.com/story/us-retail-sales-off-to-good-start-as-the-holiday-season-gets-underway-2018-12-14)
portraying a healthy consumer and a solid start to the holiday
shopping season, underlining solid fundamentals at home.
"Last we checked, the Fed is in the business of addressing
economic fundamentals, not the musings of a market that seems
completely unwilling to acknowledge the incredibly solid U.S.
economic backdrop," Porcelli said.
The Fed meeting dominates the economic calendar in the week
ahead, with investors looking for a quarter-point rate increase,
which would be the fourth such move of 2018.
Other highlights include data on November housing starts and
building permits on Tuesday, existing home-sales figures on
Wednesday, and revised third-quarter gross domestic product data,
November durable-goods figures, and data on November personal
income and spending on Friday.
See:Economic Calendar
(http://www.marketwatch.com/economy-politics/calendars/economic)
(END) Dow Jones Newswires
December 17, 2018 09:24 ET (14:24 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.