Economic Update 9-09-2019

• Economic news for the week included positive results for the ISM services index, while the ISM manufacturing index contracted. Employment results were mixed, with the nonfarm payroll report somewhat slower than expected.
• Equities rose on optimism for a trade resolution last week, both in the U.S. and abroad. Bonds, however, lost ground as interest rates ticked higher. Commodities gained a bit, led by sharply higher prices for natural gas.

Last week, as with most weeks recently, was driven by rumors and news reports surrounding the U.S.-China trade situation. It began negatively, with China reporting U.S.-imposed tariffs to the WTO as a proposed violation. While mainly a formality, or attempt to circumvent the stalled negotiation channels, it did serve as a way to antagonize U.S. officials. Though, by mid-week, positive sentiment flowed from reports of a proposed U.S.-China meeting in Washington in October. This was coupled with the Chinese agreeing to withdraw the Hong Kong extradition treaty, which was the catalyst for recent ongoing protests there. While not related to the trade skirmish per se, Hong Kong is a potential East vs. West flashpoint, adding a wildcard to the increasingly-chilly U.S.-China relationship. There are already several areas of potential conflict, including the sovereignty of Taiwan (claimed by China in concept as part of the mainland, rather than its current status as an independent entity), and oversight of critical shipping lanes in the South China Sea.

Every sector ended in the positive last week, led by communications, consumer discretionary, energy and technology; defensive bond proxy utilities lagged with a minimal gain.

Foreign stocks in developed markets gained in keeping with U.S. equities, helped by a rare weaker U.S. dollar. Fears of a ‘no deal’ Brexit seemed to decline over the past week, which helped ease fickle U.K. sentiment, although the political situation there remains fluid and very convoluted. Emerging markets outperformed all other groups in the back of improved trade sentiment which could benefit those regions to a more substantial degree—demonstrated by gains that were widespread and similar among key EM nations. The Chinese central bank also decided to cut bank reserve requirements by 0.50-1.00% (depending on the type of bank), effectively easing monetary policy, which typically pleases markets hoping for relief from the strains of the U.S. tariffs.

U.S. bonds pulled back last week as interest rates stabilized and rose only slightly across the yield curve. Treasuries fared a bit better than investment-grade corporates, while high yield and floating rate bank loans outperformed by earning positive returns. Despite the dollar falling, which is usually a tailwind, developed market sovereign bonds lost ground as interest rates edged up from more negative levels, while risk-taking pushed emerging market bonds to the highest gains of the week for any group.

Real estate gained, in keeping with broader equity sentiment in the U.S., while international REITs rose to a lesser degree, outside of Europe, which saw negative returns.

Commodities as a whole gained last week, helped by the slight weakening in the dollar, more optimistic economic prospects, and difficult weather conditions. The price of crude oil ended up gaining by over 2% to around $56.50/barrel, with lower U.S. supplies and comments from Iran indicating possible movement away from the nuclear deal of recent years. Natural gas prices rose nearly 10%, presumably due to uncertain impacts from Hurricane Dorian on the East Coast.

With Labor Day having passed, markets have now moved into the ‘winter’ period, which has historically been characterized by higher volatility—both on the downside and upside. In fact, September ranks as one of the markets weakest months over the past century, while, on the other hand, Q4 has ended as the highest-performing of all calendar quarters. While the reasons for market seasonality tend to remain mysterious, aside from traders classically going back to work from vacation in the Hamptons or elsewhere, investors have seemed to cast the current year’s prospects aside and look at the new year ahead (usually) with greater optimism, although the past year has been sullied by guesses regarding timing of the current business cycle’s inevitable end.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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