Stocks enter final full week of the year on the brink of a bear market

Hanging over the market in the week ahead are the government shutdown fight which pitted the president against Democrats in Congress, over his plan for a border wall. There was a glimmer of hope late on Friday that a deal could be hatched with Sen. Bob Corker saying a path forward was being discussed.

While traders said there was not much concern about the partial shutdown, a bigger worry was the fighting which could become the norm once Democrats have control of the House in January.

“It does seem like its weighing on sentiment. It’s more a signal about just how difficult things will ultimately be. It enhances expectations for gridlock in the future,” said Cabana.

The Fed this past week was viewed as a major catalyst for the sell-off, after it released a forecast for more rate hikes, at the same time it sees a slower growing economy.

That sparked concerns that the Fed was heading for a policy mistake, and comments from Fed Chairman Jerome Powell that the Fed’s balance sheet roll down was on ‘autopilot’ really spooked traders.

But on Friday, New York Fed President John Williams kicked off a brief stock market rally when he told CNBC the Fed is willing to reconsider its policy depending on the economy and conditions. His comment was not unlike Powell’s, but traders said he sounded more flexible and sensitive to market conditions.

Strategists point to a few big concerns for the markets heading into next year — the most worrisome being trade and the Fed. Wilmington Trust chief economist Luke Tilley said his base case is there will be a trade agreement with China that avoids the next round of tariffs.

“The tariffs so far don’t have much impact on the economy,” he said. “If we moved into 2019 and all tariffs were implemented, that would very quickly outweigh all stimulus we have coming into 2019..That would be a weight on GDP growth and bring our numbers down for next year.”

Cabana said growth for the beginning of the year looks good, and if sentiment could stabilize that might help markets. Treasury yields fell in the past week, with the 10-year yield at 2.78 percent Friday.

“We think rates could be higher. We think 3 percent is reasonable…but quite honestly risks appear quite heavily to the downside,” he said. “The bigger ones are international and geopolitical in nature—what happens to trade, China’s ecnomy, Brexit, European populism and gridlock in the U.S “

Cabana said the low end of the range for the 10-year yield could be 2.5 percent.