Weekly market update

Last week we saw the S&P 500 and the NASDAQ drop more than 3% for the first time this year, and just one week after setting new all-time highs. The same thing occurred twice in 2018. The Dow and the Russell 200 were down over 2.5%.

Two things were responsible for the selloff after a strong July—the FED’s rate decision/press conference and trade tensions mounting.

The FED cuts rates for the first time in a decade, but the market expected that. It was the press conference that troubled investors. The answers FED Chair Powell gave were all over the place. He exuded zero confidence that he and his colleagues have a clear idea of what is going on or what will happen next. He could have articulated that if uncertainty continues around the trade, this will be a headwind for the economy and will carry dovish implications to monetary policy. But Powell chose to not articulate any of this, instead delivering a mixed and confusing message.

On top of that, President Trump tweeted out that he was going to hit China with another 10% tariff on $300 billion of goods. That was all it took for stocks to tumble. It is very hard to trade when randomly timed headlines/tweets can have such a huge impact on the markets.

It’s crazy but it is what it is.

Then in the next round of tweets he said he was open to delaying them if China took some positive actions between now and September 1.

And boy did China take some action. Over the weekend they devalued their currency to the lowest level since 2008. And that sent shockwaves through stocks and bond yields pre-market. The yield on the 10-year U.S. Treasury bond fell to 1.76%. We haven’t seen yields that low since late 2016, and all of this is stoking global growth fears once again.

However, data released over the last few weeks have been key to gauging the state of growth. We got the first read on second quarter GDP where it showed the economy grew at an annualized rate of 2.1% for the quarter and revisions confirmed that although the U.S. economy is slowing down, it doesn’t appear to be stalling.

The July employment report shows the labor market remains solid, but wage growth remains muted, suggesting that inflation remains soft.

Around the globe; however, manufacturing PMI figures continue to trend lower falling below 50, which is seen as contractionary. Here at home, manufacturing PMI figures fell to the lowest since 2009.

With the U.S. manufacturing PMI figures the weakest since September 2009, and the ISM Manufacturing Index the lowest since August 2016, the FED is pretending that it sees no problems in the U.S. economy.  It’s also denying weakness in housing, autos, trade and retailers.

As we head into the first full week of August, we expect to proceed with caution as August has traditionally been a bumpy ride, second only to September. We will wrap up earning season which will take away any upside catalyst from earnings. We will get more of a read on the economy, which may or may not give the FED cover to lower rates at the September meeting, but FED Chair Powell did say that cutting rates isn’t going to be a new trend. Yet, if the data is bad enough, it could force them into lower rates once again. So, stay tuned and we’ll keep you posted.

Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
August 5, 2019

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