Volatility, the Fed, and the Holidays: Here’s How Investor Portfolios Could Be Impacted in December

Investors can expect more volatility in December, when the stock market could react to a number of events.

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Key Takeaways

  • Expect likely ongoing volatility with December’s slate of events
  • Consumer stocks are in focus as the holiday shopping season gets in gear

  • Evaluate your portfolio and get your finances in order as the new year begins

Though the U.S. midterms and most of Q3 earnings are squarely in the rear-view mirror, December might continue to keep investors on their toes with a key Fed meeting, preparations for Congressional transitions in Washington, a crumbling crude oil market, and accelerating trade talks between the U.S. and China.

The volatility that picked up steam in October rolled right into November with more wild trading, and it’s unlikely that volatility will slow in December considering all the calendar items. Amid the rate hike concerns and tariff worries, investors might be watching U.S. holiday shopping to see if the strong economic growth earlier this year translates into heavier consumer demand. If it does, that’s a potential boost for retailers as well as big tech companies like Apple, shipping companies like FedEx (FDX) and payments processing companies like Visa (V).

Volatility Still Might Be Only Thing That’s Predictable

Entering November, we pointed out that October’s volatility would likely carry into the new month. It did and it’s hard to expect anything different in December, especially with geopolitics still playing such a big role. The midterm elections might have caused some choppy trading, but just because they’re out of the way doesn’t mean the uncertainty is.

In fact, it could be argued that things look even more unpredictable now because no one is quite sure how the newly-elected House Democratic leadership might govern when it takes over in January. Some analysts say gridlock has historically been good for the markets and that stocks often have risen after midterm elections. However, it’s never a good idea to let past performance guide future investment.

Long-term investors should remember that volatility is now back to historic levels after a long vacation last year, and they should try not to get caught up in the day-to-day, minute-to-minute stock market moves.

Figure 1: Volatility Expectations Rise, but Not Uncommonly So. The Cboe Volatility Index (VIX - candlestick chart) moved above 20 in recent days. Although Wall Street’s fear gauge is higher than it has been for much of the last couple years, this 20-year chart, with a blue line drawn in at 20, shows such readings are not uncommon, even over extended periods. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Instead, December might be a good time to review your investing plan. If you have specific financial goals, are you on track to hit them? If not, what steps do you need to take to get there? If you’re thinking about rebalancing your portfolio, take the time to do some research and ask questions, either by talking to your advisor if you have one, or by reaching out to your broker’s service team.  

For more active traders, now is a good time to look back on your year and keep an eye out for potential opportunities, both in the short and long term. TD Ameritrade clients can access market calendars by logging into their accounts via the thinkorswim® platform or TDAmeritrade.com. Additionally,a list of December events is below.

No matter what kind of investor you are, remember that investing is a marathon, not a sprint. Historically, the stock market has grown over longer periods of time, but bear markets and corrections are always a possibility, as investors were reminded this year with two drops of 10% in the S&P 500 Index (SPX). Take into account your timeframe and don’t invest money in riskier assets if you’re going to need it in the short-term to cover important living expenses or big purchases.

November: A Month to Remember

Looking back at the first half of November, the markets calmed down slightly the week of the election, with the most closely watched “fear index,” the Cboe Volatility Index (VIX), falling to around 16 after climbing as high as 26 in October. However, the very next week saw uncertainty return, with the VIX climbing back above 20 as crude oil prices tumbled to 11-month lows and global economic uncertainty deepened while the U.S. and China continued to spar over trade policy. A spiking U.S. dollar, which jumped to 16-month highs, also seemed to put pressure on stocks. The 10-year Treasury note yield slipped from October highs above 3.25% as investors appeared to embrace Treasuries, the dollar, and other so-called “safe haven” investments like consumer staples.

One question heading into December is whether investors continue to keep this “risk-off” strategy or if they start feeling more confident about embracing some of the “momentum” stocks in technology and communication services that helped the market ride to all-time highs back in September. It’s easy to say the rally stumbled due to overseas issues like China trade and continued (and seemingly endless) negotiations over Brexit. But it’s also important to note that company-specific issues within these sectors also might have played a role.

Sweet and Sour Earnings

Looking at Q3 earnings season from a high-level, results generally seemed quite good. Earnings per share rose more than 20% from a year earlierfor S&P 500 companies, and a higher than average percentage of firms beat analysts’ estimates on both earnings and revenue.

Digging a little deeper, however, there were some aspects that analysts and investors seemed to be concerned about. Apple (AAPL) profits rose 41%, but iPhone sales were flat, and the company delivered an outlook for the holiday quarter that failed to impress many analysts. The stock got smacked and its momentum appears to be slowing, and some analysts expect the company to increasingly expand its focus in areas outside of iPhones.

Amazon (AMZN) also got taken out to the woodshed by investors after guiding for a less bountiful holiday period than some analysts had expected. Blue chip General Electric (GE) had profit that was lower than expected, and it cut its dividend to 1 cent per share. GE has been saddled with debt and business problems for some time. The stock took a nosedive after its results, falling double digits.

On the positive side, there was plenty of Q3 company earnings reports that blew past analyst expectations. A lot of the good news seemed to come from consumer-focused stocks and might reflect consumer confidence levels that are at the highest they’ve been in 18 years. Starbucks (SBUX) enjoyed a strong quarter, and Under Armour (UAA) beat estimates. Fitbit (FIT) shares rose 33% in one week after providing higher-than-expected earnings guidance and selling 3.5 million devices.

In addition, Disney (DIS) posted record revenue and profit in Q3. Its film studio business saw 50% year-over-year growth after the release of Star Wars: The Last Jedi, Black Panther and Avengers: Infinity War as it gears up to release Disney+, a Netflix(NFLX) competitor, next year.

December Earnings To Watch

December isn’t typically associated with lots of earnings, but that doesn’t mean the calendar is empty. For instance, Nike (NKE) is expected to report during the month, and it’s a Dow Jones Industrial Average ($DJI) member often closely watched for insight into consumer spending around the world.Athletic clothing retailer Lululemon (LULU) is also on the December earnings calendar.

Other major earnings reports during the month include Kroger (KR),Oracle (ORCL), Adobe (ADBE), Costco (COST) and Conagra (CAG). Stay on top of major earnings news on the Earnings Reports page.

Fed Christmas Gift: A Likely Fourth Rate Hike

Speaking of the December calendar, investors might want to circle Wednesday, Dec. 19. That’s the day the Fed concludes its final Federal Open Market Committee (FOMC) meeting of 2018, and futures markets signal a strong chance they’ll hike rates for the fourth time this year. The range of the Fed funds target rate is 2% to 2.25%, the highest in more than a decade. As of mid-November the futures market pegged chances of a December hike at about 76%.

The Fed’s November meeting ended with no action on rates, but the statement following the meeting maintained previous language about the Fed expecting “gradual rate hikes” ahead. This seemed to disappoint some investors,judging from the downward market action that followed. Perhaps there were some who thought the Fed might ease up, considering the market’s recent struggles.But it seems fair to say that the Fed is more concerned about the chance of rising inflation amid nearly 50-year lows in unemployment. A number of Fed speakers have sounded hawkish lately, adding to investor sentiment that the central bank doesn’t plan to depart from the current path in which rates have risen from basically zero less than three years ago.

Higher rates have been a constant over the last year or two, but it’s only since the start of fall that the rising interest rate environment really seemed to hit the market. Between the outlook for higher borrowing costs and the chances of tariffs hurting foreign sales, many S&P 500 companies have been dialing back their outlooks for the Q4 and beyond, bringing a lot of pressure to stocks.

One big event at the very beginning of December that might have some impact on this is the expected meeting between President Trump and Chinese President Xi at the G20 meeting Nov. 30 to Dec. 1. Any sign of warming relations between these two economic superpowers would probably remove some pressure from Wall Street, but as of mid-month there was little sign of a thaw.

Another factor that could help shape market action in December is one that’s showing signs of a struggle: Housing. The home building sector took a beating in November as the housing outlook began to look softer amid higher mortgage rates and rising prices. Both home-building companies and home improvement companies like Home Depot (HD) got caught in the mix. A key reading on home builder sentiment for November—the National Association of Home Builder’s housing-market index—fell steeply. Investors might want to keep a close eye on all this as well as the regular monthly data on home sales, because the slower home market might indicate consumer hesitation about making big, long-term expenditures despite the solid U.S. economy.

Steering Your Portfolio Into the New Year

If rates continue to rise, investors might want to consider how higher rates might affect both the stocks and fixed-income investments in their portfolios. Sometimes higher rates can indicate an economy that’s firing on all cylinders. More cyclical stock sectors like technology, industrials, and financials have typically performed well at such times in the past, while Treasury bonds (which move opposite of yields)have flagged. So-called “defensive” sectors that rely on dividends to draw investors sometimes fall in rising interest rate environments because dividends can have trouble competing with Treasury yields.

Investors have several options to brace for volatility in stocks. They can consider increasing their cash holdings or investing in more stable investments like CDs, U.S. Treasuries or highly rated bonds. The end of the year is an ideal time to ensure your portfolio’s allocations are not only diverse, but balanced.

Things might be a bit different this time, however, because stocks are already historically high, and this bull market has been around for so long. The heat from geopolitical pressures and sagging overseas markets could also be factors. All of that might help explain some of the recent strong performance in utilities, consumer staples, and the U.S. dollar, which are areas investors frequently embrace at times of concern.

There’s little doubt the U.S. economy remains strong, with 250,000 new jobs added in October and a 3.1% rise in hourly wages, the largest since the 2008/09 recession. However, wage inflation sometimes lends to broader inflation, pointing toward more possible rate increases. The December rate hike is widely expected, but investors might start turning their eyes more toward the Fed’s 2019 and beyond plans.

A new “dot plot” from the Fed that will be released Dec. 19 could give investors a better sense of where Fed members expect rates to be in a year or two. The dot plans are published in a news release after each Fed meeting. As of September, the dot plot showed rates huddled around 3% by September 2019,and near 3.5% by September 2020. Whether that happens depends a lot on whether the U.S. economy can keep up its recent hot pace into the new year, and on whether economies in Europe and Asia can get a lift after stumbling in 2018.

Interested in learning more? Checkout our webcast page and register for a free session with an education coach. 

Mark Your Calendar

Here are a few data and events to watch for in December. 
December 6OPEC Meeting
December 7 Jobs Report
December 18 - 19Fed Meeting
December 11Producer Price Index (PPI)
December 12Consumer Price Index (CPI)
December 14Retail Sales
December 19Existing Home Sales
December 21Durable Goods
December 21 Gross Domestic Product (GDP)
December 27New Home Sales

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