Market Update: September 13, 2019
Market Update: September 13, 2019

Market Update: September 13, 2019

 

By:

Kevin Rice
Kevin Rice
Investment Analyst
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Market Update: September 13, 2019

TC on the Markets

Market Update

In August stocks posted their worst monthly performance since May as rising trade tensions between the U.S. and China decreased market sentiment. Stocks swung widely on frequent trade news between China and the U.S., bouncing between progress on negotiations and the escalation of tariffs. Weak global economic data and increased concerns over a slowdown in the U.S. economy also contributed to the increase in volatility.

August: Historically Most Volatile Month

Over the past 30 years, August had the worst average monthly returns and has historically been the most volatile. Through the end of the year, we expect volatility to remain elevated due to the unresolved trade dispute, concerns surrounding Brexit and upcoming U.S. Fed policy decisions.

S&P 500 and Emerging Markets

At the end of August, the S&P 500 was down -1.58% for the month but still up a solid 18% in 2019 (Exhibit 1). The S&P finished August (2926.46) at almost the same level that it was at the end of August 2018 (2901.52). Emerging markets led foreign equity markets lower as the MSCI Emerging Markets index returned -4.87% in August. Emerging markets have been faced with a strengthening U.S. dollar and another debt crisis in Argentina.

Fixed Income Markets

Turning towards fixed income, yields across the global investment-grade universe have plummeted, with the total market value of negative-yielding debt in the Bloomberg Barclays Global Aggregate Index now over $16 trillion. The U.S. market is the only place where positive yields are available in abundance, as the U.S. has 95% of the positive yield in the investment-grade space. Treasury bonds posted double-digit returns for the month as the 30-year Treasury yields fell below 2% for the first time ever, and 10-year Treasury yields reached a three-year low. The Bloomberg U.S. Aggregate Bond index returned 2.59% and is now up 9.10% this year.

Trade Talks, Consumer Spending and the Fed

During the first week of September the market moved higher after news that the U.S. and China agreed to hold trade talks in Washington in October, but recession fears still linger. In our view we still believe that solid consumer spending, still-rising corporate profits, and accommodative monetary policy will help extend the economic expansion and drive the markets higher. On September 17th-18th the Federal Reserve (Fed) will meet to determine the next steps in their monetary policy. We believe that the Fed will announce on September 18th a quarter point rate cut of the Fed Funds Rate.

Exhibit 1 Source: TC Wealth Partners, Morningstar

Recession Indicator Update –
Institute for Supply Management (ISM) Manufacturing Index

  • What Is the Current Signal?
  • The ISM index dipped below 50 in August to 49.1, a level which indicates that manufacturing activity is contracting (Exhibit 2). This was the first dip below 50 since January 2016. New export orders dropped to their lowest level since 2009, a sign that the trade war is impacting manufacturing activity.
  • Why Does It Matter?
  • Manufacturing is a small portion of the overall economy but comprises a large share of its volatility. We don’t think the sharp decline in export orders will trigger a recession because exports only represent about 13% of U.S. GDP. Recent data has shown that consumers continue to spend and confidence remains high, so we expect the economy to continue to grow modestly for the remainder of the year.
Exhibit 2 Source: TC Wealth Partners, Bloomberg

Recession Indicator Update –
Nonfarm Payrolls

  • What Is the Current Signal?
  • The August employment report showed that the U.S. economy added 130,000 jobs during the month (Exhibit 3). Monthly job gains have slowed to a 158,000 pace in 2019 from a 223,000 pace in 2018. The report indicated that hiring in the manufacturing and retail sectors was weak, reflecting the uncertainty of the ongoing trade war with China. As I mentioned in my previous post, we expect that the pace of monthly hiring is going to moderate as companies continue to deal with tariffs and the ongoing weakness abroad.
  • Why Do They Matter?
  • A negative nonfarm payroll’s number is a clear indication of a recession. Job growth is the key data point defining recessions because the loss of jobs greatly impacts spending of the U.S. consumer and negatively influences economic growth. Although the pace of job growth has slowed, companies are still hiring which we believe will help consumers remain confident in the economy and continue to grow the economy.
Exhibit 3 Source: TC Wealth Partners, Bloomberg

Recession Indicator Update –
Average Hourly Earnings (AHE)

  • What Is the Current Signal?
  • Average Hourly Earnings rose by 0.4%, and the one-year change in AHE fell by 0.34% (Exhibit 4). We believe AHE growth will continue to slow as uncertainty regarding the international trade situation is likely to keep businesses from raising wages higher than the current pace.
  • Why Do They Matter?
  • As earnings growth slows, consumers tend to spend less, which negatively influences economic growth. The slowing of economic growth impacts the willingness and ability of businesses to hire and pay employees. We do not believe the slowing of wage growth indicates that a recession is near.
Exhibit 4 Source: TC Wealth Partners, Bloomberg

Recession Indicator Update –
Unemployment Rate

  • What Is the Current Signal?
  • The unemployment rate was unchanged in August at 3.7% and remains near a 50-year low (Exhibit 5).
  • Why Does It Matter?
  • The unemployment rate rising on a y/y basis is a consistent pre-recession signal. Typically, the rate goes higher when the economy experiences hardship and goes lower when the economy is improving. The trend is still on the low end of historical changes before prior recessions. We will continue to watch the data because the unemployment rate tends to jump an average of 40 bps y/y in the month before recessions begin.
Exhibit 5 Source: TC Wealth Partners, Bloomberg

 

Tags:  Consumer Spending, Emerging Markets, Fixed Income Markets, Market Update, Recession Indicators, S&P 500, September 2019, TC on the Markets, The Fed, Trade Talks, Volatile Month

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.