Weekly market update

August has historically been a volatile month and this past August didn’t disappoint. Stocks rallied to close out August snapping a four-week losing streak, but when the books closed on August the Dow was down 1.32%, the S&P 500 was down 1.59% and the NASDAQ was down 2.60%.

Traders and investors had a lot of issues to digest last month. Obviously, trade tensions between the U.S. and China ruled supreme. Then followed, interest rates, yield curve inversion and global economic slowdown. On the geo-political front, the Brexit is starting to weigh on investor sentiment again as it draws closer (October 31).

By and large, the biggest issue was trade between China. One day there were conciliatory comments that sent stocks soaring and the next day, tensions escalated and stocks plummeted. It’s obvious that investors want a resolution to the trade tensions, but I don’t think we’re anywhere close to a deal. It’s been exhausting—we’re in, we’re out, we’re raising tariffs, we’re delaying tariffs, China retaliates, china backs off, meetings/calls are on, meetings/calls are off. You can see how that could cause major angst. And it wasn’t just among investors. President Trump couldn’t take it anymore and shared details about “high level” calls with China and BOOM stocks soared, erasing most of the monthly decline.

The next biggest issue that investors dealt with last month was the wild ride in U.S. Treasury yields and the yield curve inverting. We started the month off with the yield on the 10-year Treasury around 2.02% and hit a low of 1.44%. There is no doubt that low or negative rates abroad, induced by economic weakness, are exerting downward pressure on U.S. rates, as capital seeks higher but safe returns. See, when investors are piling into Treasuries, it pushes yields lower and prices higher, in fact, the Barclay’s aggregate bond index is having its best year since 1995.

Not only did those yields fall, but the short end of the yield curve, the 2-year Treasury rose above the 10-year yield. That means that you could earn more interest by owning a 2-year treasury than owning a 10-year. This stoked recession fears to an all new level, and the market is treating the “yield curve inversion” like the Ebola virus for stocks. I’m afraid that the consumer is being talked into a recession. Again, a recession is when we have two consecutive quarters of negative GDP and that isn’t happening just yet. The latest read on Q2 GDP was 2%–that’s not close to being negative.

Turning to the U.S. economy, U.S. Chicago FED National Activity Index for July remained negative and a little more than previously reported. Core durable goods orders missed and shipments exhibit largest drop in three years. But the Chicago PMI figures actually rose. And the University of Michigan consumer sentiment reading had its biggest monthly drop since 2012 (think uncertainty about the economy), but consumer spending soared, so the consumer isn’t too bearish.

The markets opened September on a down note because a new round of tariffs just hit on Sunday and we also got a poor reading from the ISM manufacturing index. It fell into contraction territory for the first time since 2016, so that is something we’ll be watching. We will also be looking to see how the August jobs growth comes out later this week and then all eyes will be on the FED to see if they cut rates at this month’s FOMC meeting and what they have to say about forward guidance on the economy and monetary policy. There are really no earnings to speak of, they won’t crank up again until October. So, stay tuned and we’ll keep you posted.

 

Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC

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