Market Update: November 8, 2019
Market Update: November 8, 2019

Market Update: November 8, 2019



Kevin Rice
Kevin Rice
Senior Investment Strategist
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Market Update: November 8, 2019

TC on the Markets

Market Commentary

In October, the global equity markets posted another positive month, sending the major indices up roughly 20% for the year. Positive developments on trade negotiations, a Federal Reserve interest rate cut, and better than expected economic data all helped the markets move higher.

Domestic and International Markets

At the end of October, the S&P 500 was up 2.17% for the month and is now up 23.16% in 2019 (Exhibit 1). U.S. equities hit all-time highs during the month, but their performance trailed foreign equity markets as the U.S. dollar saw its largest monthly drop in a year. International markets rallied in October with the MSCI ACWI ex. U.S. index returning 3.50% and the MSCI Emerging Markets index returning 4.23%. Signs of progress in trade talks, further global central bank easing and U.S. dollar weakness all proved supportive. The MSCI Emerging Markets Index outperformed the MSCI World (2.57%) for the first time since January.

Fixed Income Markets

During the month, the 10-year U.S. Treasury yield rose above the yield on the 3-month T-bill. This portion of the yield curve had been inverted since May 2019. The 3-month T-bill yield ended October at 1.52% and the 10-year Treasury yield increased to 1.69%. The increase in yields caused the Bloomberg U.S. Aggregate Bond index to return only 0.30% but is still up 8.85% this year. We believe the recent curve steepening has been driven by the Federal Reserve lowering short-term rates, as well as more favorable developments in the trade war which have pushed up U.S. Treasury rates.


The White House announced a tentative “Phase 1” agreement with China on October 11th. The deal is expected to be officially signed sometime in the next couple of weeks. The Trump administration has not yet decided on how to address the planned increase of tariffs, which are scheduled to start on December 15th. Details of “Phase 2” of the trade deal still need to be worked out. Trade uncertainty is likely to remain high until a permanent resolution is reached, but we believe any positive trade news will likely benefit the markets.

Fed Reserve

The Federal Reserve reduced interest rates by a quarter percentage point at its Otober 30th meeting. This is the third time interest rates have been cut since July. After the meeting the Federal Reserve chair stated that monetary policy was in a good place, and that its members will assess the state of the economy with the current stimulus measures already in place before deciding on further rate cuts. We believe that the recent favorable turn in trade talks, the rebound in equities, and the steepening of the yield curve could limit the need to cut rates further. However, we expect weak economic data to compel the Fed to cut rates again in the coming months.

Exhibit 1 Source: TC Wealth Partners, Morningstar

Update on Recession Indicators:

Consumer Confidence Index

  • What is the current signal?
  • U.S. consumer confidence fell in October amid household concerns about the short-term outlook for business conditions and job prospects. Consumer confidence has been declining since August as the trade war has continued between the U.S. and China. The trade war has impacted business sentiment, leading to a decline in capital expenditure, contributing to a downturn in manufacturing. Still, the confidence index remains relatively high (Exhibit 2) and we believe that it will lead to continued growth in consumer spending.
  • Why does it matter?
  • When consumer confidence is high, consumers feel good about the economy and tend to make more purchases. When it is low, consumers do not feel good about the economy; they save more and spend less. A fall of 15% in the year over year (y/y) change in consumer confidence and an index level around 110 tends to be a clear signal of an imminent recession. Consumer confidence can turn lower very quickly, and a recession can start soon after it turns.
Exhibit 2 Source: TC Wealth Partners, Bloomberg

Nonfarm Payrolls

  • What is the current signal?
  • The economy added 128,000 jobs in October, and after the revision of previous months data the three-month trend in job growth has turned higher since July (Exhibit 3). The three-month average of jobs created is now 175,000, which is above the pace needed to keep the unemployment rate around its current level but is still lower than the monthly average of 223,000 jobs created in 2018. We believe that the labor market is still healthy and can continue to power the economic expansion.
  • Why do they matter?
  • A negative nonfarm payroll’s number is a clear indication of a recession. As discussed in my post last week, 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. The last five recessions have all exhibited negative growth in nonfarm payrolls, with payroll growth generally declining for a year or more before the recession started.
Exhibit 3 Source: TC Wealth Partners, Bloomberg

Institute for Supply Management (ISM) Manufacturing Index

  • What is the current signal?
  • The ISM manufacturing index remained in contraction territory in October but improved slightly to 48.3 (Exhibit 4). While manufacturing remains in contraction territory, the ISM suggests that the situation has at least not gotten worse over the past month. Trade tensions eased a bit in October, with prospects of a “Phase I” deal between the U.S. and China. The deal has yet to be signed, and a full resolution to the trade issues looks to be far off so uncertainty will likely weigh on capital spending. A reduction in capital spending could lead to companies to pull back on hiring in the coming months.
  • Why does it matter?
  • Manufacturing is a small portion of the overall economy but comprises a large share of its volatility. Swings in manufacturing impact corporate profits and can influence future spending and hiring plans. The lead time before a recession is inconsistent, but the ISM index tends to fall below 50 before or at the start of recessions and approaches the low 40s in a recession.
Exhibit 4 Source: TC Wealth Partners, Bloomberg

Yield Curve

  • What is the current signal?
  • In October, the Federal Reserve interest rate cut helped un-invert the 3-month T-bill and the 10-year U.S. Treasury yield curve, the first time in six months (Exhibit 5). Longer maturity U.S. Treasury yields increased modestly in October as economic data exceeded expectations. Ten-year Treasury yields increased to 1.69% while 30-year Treasury yields increased to 2.18%. The curve remains historically very flat and near inversion, but we believe that it is signaling modest economic growth in the coming months.
  • Why does it matter?
  • A yield curve’s shape helps investors understand how interest rates are expected to change in the future. It also indicates likely economic fluctuations. When the U.S. economy starts moving from healthy growth to a contraction, the yield curve usually first flattens and then inverts. Since 1955 the inversion of the yield curve has preceded all nine recessions except for one in the mid-1960s. The time varies between the inversion and the start of the recession, but it generally occurs within a 24-month period.
Exhibit 5 Source: TC Wealth Partners, Bloomberg


Tags:  Consumer Confidence Index, Domestic and International Markets, Federal Reserve, Fixed Income Markets, Manufacturing Index, Market Update, Nonfarm Payrolls, November 2019, Recap for October 2019, Recession Indicators, S&P 500, TC on the Markets, The Fed, Trade, Yield Curve

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.