Week 33 Sitrep

The “yo-yo” stock market continues last week (and into this week) as we have seen the return of volatility to global stocks. The markets cannot seem to decide whether the news-of-the-day is good or bad for future growth; thus, uncertainty about the future of global economic growth is causing stocks to gyrate more than usual. The net result for last week was the S&P 500 Index closing lower by 0.40%. The smaller companies and international stocks were hit the hardest as the emerging markets index finished down 2.22%.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/12/19

 

Once again, the culprit for recent volatility DOES NOT fall into the camp of economic news, corporate earnings or the Fed. The market continues to take its cues from the all-important news-world of Twitter. The original tweet from President Trump announcing potential new tariffs against China sent stocks spiraling at the beginning of the month. Then it appeared that many goods would NOT be included in the tariffs and the market rallied. And the story continues each day with a back and forth motion to send stocks back up and then down.

Source: Bespoke Investment Group, The Bespoke Report, 8/9/19

 

To maintain proper perspective, we should note that all the major indexes are still up substantially for 2019. The index has favored larger companies with a growth tilt with average returns for the Russell 1000 Growth index better by more than 20%. However, the international indexes have had a more difficult time with the emerging markets index (MSCI EM) up by only 3.66%.2

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/12/19

Source: Bespoke Investment Group, The Bespoke Report, 8/9/19

 

Since the announcement of new tariffs on August 1st, the overall index was down 2.8% as of Friday, August 9th. Our portfolio positioning has helped our clients minimize losses during this time as we continue to focus on large companies with high quality. The technology and financial sectors have gone down the most over the last week, while utilities and real estate continue to look favorable.3 We believe that the volatility in the markets will continue based on the news cycle absent the official signing of a new trade agreement.

Source: Bespoke Investment Group, The Bespoke Report, 8/9/19

 

Another concern for the markets has been the consistent drop in yields for the U.S. Treasury bonds. We have witnessed the benchmark 10-yr U.S. Treasury Note drop from a yield just above 3% in 2018 to the recent low of 1.58%. A dramatic fall in interest rates tends to portend concern over future economic growth.4 The current rates are near all-time lows and are believed to express worry that weak economic growth in Europe will spread globally in the coming months.

Source: Bespoke Investment Group, The Bespoke Report, 8/9/19

 

To further support the claim that the economy is weakening, the OECD Leading Indicators recently recorded the lowest monthly reading since September 2009.5 The index does not always signal a coming recession but gives us clues as to which regions of the world are seeing slower growth. The longer the index continues to slow, the greater the risk of a coming global recession. One interesting note from the June readings was that the Chinese region has actually shown increasing leading indicators revealing a bottom in their index this past January 2019.

Source: Bespoke Investment Group, The Bespoke Report, 8/9/19

 

The change in economic growth expectations is a key determinant for our investment committee to ascertain if the economy will have an impact on the stock market. None of the readings we are seeing at this time cause us to change our outlook substantially. We will be interested to follow the coming months if the trend continues and will adjust portfolios accordingly.

 

Quick addendum after today’s market action – stocks reacted badly to the lower interest rates this morning and sold off about 3% for most indexes. The 30-year U.S. Treasury Bond finished the day yielding 2.02%, nearing an all-time low. Clearly, the bond market believes that slower global growth will eventually affect the U.S. economy. However, the economic news does not reflect the slowdown that the bonds would predict yet. We still do not see the current news reflecting danger for U.S. corporate earnings and believe that much of the effect on rates is based on the ongoing trade talks between the U.S. and China. We continue to monitor portfolios for unnecessary risks but do not believe the economy will be hurt as badly as the bond market implies.

 

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. J.P. Morgan Asset Management, Weekly Market Update, 8/12/19
2. J.P. Morgan Asset Management, Weekly Market Update, 8/12/19
3. Bespoke Investment Group, The Bespoke Report, 8/9/19
4. Bespoke Investment Group, The Bespoke Report, 8/9/19
5. Bespoke Investment Group, The Bespoke Report, 8/9/19

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