Weekly Market Commentary – September 9, 2019

Global stocks rallied sharply for the second straight week. Stocks have historically performed worse in September than any other month, so the positive performance comes at a welcome time. For the week, the S&P 500 rose 1.8%. Global stocks, represented by the MSCI ACWI index, rose 2%. The Bloomberg BarCap Aggregate Bond Index slipped 0.2%.

Key Points for the Week

  • Positive trade news proved enough to overcome a mixed jobs report as stock markets rallied.
  • The U.S. and European central banks will announce potential adjustments to interest rate policies in coming weeks.
  • The host of negative economic indicators is an expression of the underlying trade risk rather than a separate indicator of underlying weakness.

Stocks benefited from news that the U.S. and China would resume high-level trade talks in October. U.S. job growth fell short of expectations but still posted reasonable gains. The accompanying chart shows 130,000 new jobs were created and the one-year average is declining from very strong levels to more moderate levels of growth.

Central banks will shape much of the news in the coming two weeks. The European Central Bank meets next week and is expected to take additional steps to spur the moribund European economy. The Federal Reserve meets the following week. Investors continue to expect the Federal Reserve to cut rates later this month.

non-farm payroll-WMC

How Many Negative Indicators Can You Name?

There seem to be so many indicators flashing negative signals. The jobs data missed expectations, manufacturing is slowing, business investments are sagging, yield curves are inverting, interest rates are turning negative, GDP is slowing, and corporate profits are shrinking. It seems the only things that are rising are tariffs and uncertainty.

However, there are a few positive factors, too. Unemployment is low, wages are increasing, and consumer spending is solid. But, as one investor inquired recently, if the bad factors outweigh the good by such a wide margin, how can the economy continue to grow?

There certainly are signs of slowness, but those who cite long lists of major risk factors mistakenly treat the various risks as independent when they are very much related.

For example, to those of us living in snowy regions, slow traffic, ice on the windshield, slick roads, and cars in the ditch all indicate ice is making driving conditions difficult. Each indicator provides some value. However, once we see a car in the ditch and ice on the windshield, slow traffic ahead doesn’t provide a lot of new information, and drivers just assume the roads are still slick.

The same can be said of our current economic situation. The negative effects of trade disputes are the primary cause of the current slowdown. Tariffs, which are a tax on trade, have reduced trade activity and raised uncertainty for businesses. The increased uncertainty makes expansion riskier and curtails business investment in new equipment. Some of the new equipment would be traded goods, too, and often needs to be manufactured. So when it isn’t produced, manufacturing drops, and corporate profits feel some pressure. The overall decline in activity pushes GDP lower across the globe.

Global growth is low enough that some central banks have turned interest rates negative and parts of the yield curve have inverted, meaning short-term interest rates are higher than longer-term interest rates.

The long list of negative indicators confirms a simpler underlying truth:  Global economic conditions have already cooled considerably thanks to trade disputes, and they’re only going to get worse the longer the disputes continue. Against that list are strong labor markets and healthy consumer spending. When the negative indicators are summarized under the broad heading of “trade”, the positive/negative columns are much more similar in size.

Fun Story

Uber Drives Answers Call — From the Minnesota Twins

Randy Dobnak recently experienced a top ranking in two professions. Dobnak pitched in college but did not get signed by a professional team and elected to give independent baseball a one-year try. To make ends meet, he drove for Uber and earned a 4.99 rating, with a single four-star rating the only thing between him and a perfect record. But it was his performance on the field that caught the eye of the Twins and pulled him out of the car and onto the field. In the last two years, he has gone from the lowest levels of the minor leagues all the way to the major leagues.

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