Global stocks rallied sharply for the third straight week. The S&P 500 rose 1.0%. The MSCI ACWI index of global stocks rose 1.3%. The Bloomberg BarCap Aggregate Bond Index dropped 1.7% as optimism about future economic growth pushed interest rates higher and bond prices lower. The S&P 500 is now just below the all-time it reached in July.
Key Points for the Week
- Another week of positive trade news produced additional stock market gains.
- Retail sales were strong and reflect ongoing optimism by U.S. consumers.
- The ECB cut rates and took additional steps to spur faster economic growth in Europe.
The news was a big factor in getting markets close to new highs, but geopolitics remains a key risk factor. Positive gestures between the U.S. and China helped push markets higher. The U.S. and China delayed or deferred scheduled tariffs in advance of high-level trade talks in October. U.S. retail sales climbed a healthy 0.4% on strong auto sales, and July’s report was revised higher. As the accompanying chart shows, retail sales are up more than 4% over the last year. Core sales, which exclude autos, gasoline, and food, are up even more. The European Central Bank lowered its negative interest rates even further and resumed bond purchases to stimulate economic growth. Over the weekend, drone attacks on Saudi Arabia forced much of the country’s oil production to cease.
Central bank meetings will be a key factor this week. The Federal Reserve wraps up its September meeting on the 18th and is widely expected to lower interest rates by 0.25%. Stronger economic news and the hope of a trade deal have lowered market expectations for the number of times the Fed will cut this year. Investors will be paying close attention to the guidance the Fed gives for future meetings and the number of governors who dissent from any move to lower rates. Japan’s central bank also meets this week.
Some Policymakers are Taking Action
Last week may have been the week more policymakers finally started to take action to support global economic growth. Whether the issue is U.S.-China trade, Brexit, or slowing global growth, policymakers have not shown much urgency or creativity in pursuing solutions. In some cases, that attitude is changing.
U.S. and Chinese trade negotiators took the biggest steps. Higher-level negotiations are scheduled for early October, while talks at lower levels continue. The Chinese made two significant steps forward. The biggest step was to suggest separating the broader trade talks from national security concerns related to the use of Chinese technology inside the U.S. The Chinese also made it very clear they were interested in resuming purchases of U.S. agricultural products. The U.S. responded with a more positive tone on trade and delayed the October tariff increases by 15 days.
Because the global economic weakness is related to trade, steps toward a deal are important in reviving global economic growth. Previously, both sides seemed willing to engage in a war of attrition, increasing the negative consequence of trade disputes in not only the U.S. and China, but other trade partners.
The European Central Bank showed its own leadership by cutting rates and taking other steps to support the European economy. There is even progress being made on Brexit as Boris Johnson’s leadership is forcing people to take definitive positions.
Pessimists correctly point out there has been damage to the global economy because these leaders waited as long as they did. Pessimists also like to remind us central banks don’t seem to be effective in reviving moribund economies. This is true, but at least the actions have some benefit. These criticisms also raise the question: Who else could act that isn’t, and would it make a difference?
There are some actions that could spur confidence. The German government could loosen its fiscal purse strings to spur higher consumer spending. European policymakers could shrink the regulatory burden on companies, making growth less burdensome in Europe. Congress could ratify the USMCA trade agreement, removing uncertainty for companies. If the trend toward improved leadership continues, all these actions would likely spur markets and push growth in the right direction.
If you need to teach real-world economics to young people, this is a great story. Honeycrisp apples are very popular even though they cost more. In a competitive market, the price of apples should be similar, but Honeycrisps not only taste better, according to many, but they are more fragile. Only 60% of the crop reaches the market, and it requires more work to get the apples ready for transport. The price rises because of the extra work, so for every six apples in your bag, there are four more you are paying for.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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