Economic Update 9-30-2019

Economic data for the week included positive results for personal income and spending, as well as durable goods orders, jobless claims, and a variety of housing metrics. Consumer confidence measures were mixed, however.

Global equity markets declined to varying degrees last week, with lack of positive progress on U.S.-China trade and potential for a brewing political crisis in the U.S. Governments bonds fared better, as investors fled risk, outperforming corporate and foreign debt. Commodities generally declined along with a stronger dollar, including a sharp decline again in crude oil as supply concerns waned.

U.S. stocks generally lost ground on the week, with large caps outperforming small caps. By sector, defensive consumer staples and utilities outperformed, with gains over a percent, while communications services, energy and health care all experienced losses approaching -3%.

Markets fell Tuesday by a percent in response to the President’s antagonistic tone toward China in a United Nations speech, mostly that a ‘bad deal’ would not be accepted, creating a more pessimistic tone at that venue than some had expected. This countered hopes for a positive outcome from trade talks, scheduled to resume Oct. 7. The announcement of an impeachment inquiry against the President by House Speaker Pelosi also pulled down sentiment, as details of the Ukrainian call came to light. This was reminiscent of just over 20 years ago when the Clinton impeachment proceedings were announced (similarly, causing a rapid drop during the day of announcement but more tempered market reaction overall in the period following the shock).

By Friday, another round of negativity surrounded the Trump administration possibly restricting U.S. investor flows into China, as well as the more extreme measure of delisting Chinese companies from U.S. stock exchanges—representing an unexpected element in the ongoing trade dispute. This affected sentiment for large Chinese companies Alibaba and Tencent in particular.

The pulling of the IPOs for WeWork and Endeavor, as well as lukewarm market responses to the new IPOs for fitness company Peloton and dental firm SmileDirectClub, were a surprise to some. Initial public offerings are expensive affairs, and tend to be pulled only when potential investor interest is so poor and/or market pricing is insufficient to meet capital raising targets. It appears investors are becoming more fickle in terms of what is acceptable for stocks going public, demanding reasonable valuations and even current earnings, which is in contrast to conditions a few years ago when the ‘story’ appeared more important than current fundamentals. Fears over weakened economic growth might not be helping matters for the more speculative names.

Foreign stocks in developed markets were flat to slightly positive in local terms, but declined in keeping with equities in the U.S. after accounting for a stronger U.S. dollar. U.K. markets gained nearly a percent as the high court ruled a recent suspension of parliament by the prime minster was illegal, raising odds of a ‘no deal’ Brexit, or another extension, by the stated deadline of Oct. 31. At the same time, the eurozone flash PMI fell to its worst level in seven years, which continues to raise the odds for continued and prolonged monetary easing. (In fact, global PMI has been in contraction for four months straight.) Japan and the U.S. reached a limited trade deal, which offset data showing a manufacturing contraction and uncertainty surrounding the consumption tax increase. The latter is slated to rise from 8% to 10% in October, which a few economists feel has the potential to drive the economy back into recession (from an already low pace of growth). Emerging markets came up in the rear, with declines in local terms as well. China fared the worst, losing several percent on the lack of progress in trade talks and proposed loss of investor flows from U.S. investors, followed by Russia and Mexico, due to lower commodity prices. Indian shares gained upon implementation of a corporate tax cut to similar magnitude of that in the U.S.

U.S. bonds ticked slightly higher for the week as investors shied away from risk, which dampened interest rates on the longer-end. Longer-term treasuries again outperformed with minor gains, while high yield corporate and floating rate bank loans lost some ground. Foreign bonds in developed markets were little-changed on net, held back by a stronger dollar, while emerging market bonds lost ground in keeping with most risk assets on the week.

Real estate in the U.S. rose last week, in contrast to broader equity markets, but in line with defensive segments performing decently. Foreign REITs provided positive returns, but lagged, not helped by a stronger dollar.

Commodities generally fell under pressure of a dollar that rose nearly a percent last week. The energy sub-group declined, as did industrial metals and precious metals, while agriculture rose slightly. The price of crude oil fell by nearly -4% to around $56/barrel as Saudi Arabia announced a partial ceasefire with the Houthi rebels in Yemen, responsible for recent damage to oil drilling and production facilities.

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. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT