September 8, 2019
The chart above is the S&P 500 Exchange Traded Fund (SPY). The Red “V” marker on the chart marks the “breakout” that occurred on Thursday, September 5th. As you can see the index had been in what we call a “trading range” for 23 days, as indicated between the upper and lower black horizontal bands on the chart. Breakouts out are important. They indicate a break from the trading range, in this case to the upside. Breakouts can and do fail. A “failed breakout” happens if traders don’t continue to push the market, in this case higher. If we continue higher most likely we will test the previous time high that occurred on July 26th. Traders will be watching closely over the next few trading days. If the breakout fails, we will be back in the trading range.
Possible reasons for the breakout: China’s Ministry of Commerce spokesman Gao Feng has suggested Beijing will not immediately retaliate to America’s latest tariffs, when they kick in on Sunday. Gao told reporters that China was focused on ending the trade war, not escalating it, saying: “China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war,” “China is lodging solemn representations with the U.S. on the matter.” (As reported buy The Guardian 8/29/19). And as reported by Reuters Business News on August 28, Hundreds of retailers, footwear companies and business groups urged Trump to scrap the proposed tariffs, warning they would jack up consumer prices and trigger job losses. More than 200 U.S. footwear companies on Wednesday said the added 15% duties on shoes would come on top of tariffs that already average 11% and reach 67% on some shoes, boosting costs for consumers by $4 billion every year. “Imposing tariffs in September on the majority of all footwear products from China – including nearly every type of leather shoe – will make it impossible for hardworking American individuals and families to escape the harm that comes from these tax increases,” the companies wrote in a letter to Trump. More than 160 other business groups, including the National Retail Federation, Retail Industry Leaders Association and Association of Equipment Manufacturers, also urged Trump to postpone the tariffs, warning they would hit Americans in the middle of the busy holiday shopping season.
The VIX Index hit a recent low on Friday at 14.91 after reaching a high of 24.81 on 8/5. A lower VIX is an indication that the markets could go higher. I prefer to see the VIX under 15.
Percent of stocks above their 50 day and 200 day moving average. 43% of stocks are above their 50-day moving average and 45% of the stocks are above their 200-day moving average, which is slightly higher than last month. I prefer to see 60% or more stocks above their 200-day moving average.
Federal Reserve: The next FOMC meeting is on September 17 & 18.
Unemployment Rate: Holding steady at 3.7%
Overall, watching to see if the breakout continues to move the markets higher.
In this month’s recap: stocks descend as traders respond to the devaluation of the Chinese yuan as well as new developments in the ongoing U.S.-China trade talks; the price of gold rises, and bond yields fall.
Monthly Economic Update
Presented by Guy Woolley, September 2019
THE MONTH IN BRIEF
The stock market had a tumultuous August, reacting to the sudden devaluation of the Chinese yuan and the escalation of the trade dispute between the U.S. and China. Ultimately, investors seemed more interested in risk aversion: the S&P 500 lost 1.81% for the month. Demand for bonds helped to send Treasury yields lower; prices of precious metals climbed. Away from the markets, monthly personal spending and retail sales gains were strong.1
DOMESTIC ECONOMIC HEALTH
Tariffs and trade issues remained front and center in the Wall Street conversation. On August 1, the White House announced a 10% import tax on an additional $300 billion of Chinese goods coming to U.S. shores. (Most of these products are so-called “final” consumer goods, like clothing and shoes.) In a nod to importers and retailers, the White House stated on August 13 that this 10% tariff would be delayed until December 15 for certain products: toys, consumer electronics, and other items that are big sellers during the holiday shopping season. Effective December 15, tariffs will impact nearly all Chinese imports to the U.S.2
China soon retaliated, and the U.S. quickly responded. On August 25, China unveiled a plan to place tariffs on an additional $75 billion of U.S. goods. As part of the plan, import taxes on American-made cars and trucks would jump by 30%. Just hours later, the White House announced that the tariffs planned for September 1 and December 15 would rise by 5% to 15%, respectively, and that the 25% tariff currently in place on $250 billion of Chinese imports would rise to 30% on October 1.2
A few summer statistics from Main Street seemed to contradict anxieties that the economy might be slowing down. Consumer spending advanced 0.6% in July, and that complemented July’s 0.7% gain in overall retail sales. Core retail sales (which exclude auto and gas purchases) were up 1.0% in the seventh month of the year.3,4
A key measure of consumer confidence seemed strong: the Conference Board’s monthly index was at 135.1 in August, beating the 129.5 consensus forecast of a Reuters poll of economists. The CB’s present situation sub-index (surveying consumers’ view of the economy right now) hit 177.2, the best reading since November 2000.3,5
All this said, other indicators hinted that manufacturing activity might have hit a soft patch. The Institute for Supply Management’s Purchasing Managers Index for the factory sector declined to half a point to 51.2 in July, and the federal government reported July retreats of 0.2% for industrial output, 0.4% for factory production, and 0.4% for core durable goods orders, which do not include the volatile transportation category (total durable goods orders, however, were up 2.1%). ISM’s monthly PMI for the service sector also lost ground, slipping 1.4 points in July to 53.7.4
The labor market added 164,000 net new jobs during July, according to the Department of Labor. (The revised June number: 193,000.) Unemployment remained at 3.7%. The U-6 rate, which counts both the unemployed and underemployed, fell a respective 0.2% to 7.0%.4
The Bureau of Economic Analysis delivered its third (“final”) estimate of second-quarter economic growth in late August: 2.0%. That number beat the 1.9% consensus forecast of economists polled by MarketWatch.3
Federal Reserve Chairman Jerome Powell’s spoke on August 23 at the Kansas City Fed’s annual Jackson Hole banking conference. Powell said the Fed was “carefully watching developments” and would “act as appropriate” if U.S. economic conditions weaken. The next Fed policy meeting is less than two weeks away. Wall Street wonders if Fed policymakers might be inclined to make a rate cut; comments from multiple Fed officials at Jackson Hole did not point to a consensus on that matter.6
GLOBAL ECONOMIC HEALTH
On August 5, China shocked financial markets worldwide by devaluing its main currency, the yuan, to a level unseen since the 2008 credit crisis. The rationale for this move was clear: by cheapening the yuan, China could make its exports more affordable for American buyers, effectively countering tariffs. Reaction on Wall Street was swift: U.S. stocks had their worst day of the year. The Department of the Treasury immediately called China a “currency manipulator.” With China’s economy growing at its slowest pace in 30 years, this could invite greater inflation.7
In another surprise, Boris Johnson, the United Kingdom’s Prime Minister, announced that Queen Elizabeth had agreed to a sudden, outside-the-box political idea. On August 28, Johnson said that he had asked the Queen to suspend Parliament for a month beginning in mid-September, with U.K. lawmakers reconvening on October 14. That would give Parliament two weeks to consider and approve a Brexit strategy. A no-deal Brexit – the kind Johnson favors – may have a better chance of passage under such a tight timeline.8
Also notable: the decline in government bond yields in key countries. Demand for bonds has sent prices of government-issued notes higher, and as a result, their interest rates have declined. Last month, roughly a quarter of the global bond market was invested in government notes bearing negative yields.9
WORLD MARKETS
Many foreign indices took August losses, but there were some exceptions. In Russia, the Moex advanced 0.20%, and in Canada, the TSX Composite gained 0.22%. Mexico’s Bolsa registered a major August gain, rising 4.31%.10
The emerging markets were hard hit last month. In fact, MSCI’s Emerging Markets index took a 5.08% fall. MSCI’s World index lost 2.24%. Hong Kong was beset by unrest, and its Hang Seng benchmark dove 8.60% for the month. China’s Shanghai Composite fell 2.24%; South Korea’s Kospi, 3.48%; the Singapore STI, 7.28%. Even Japan’s Nikkei 225 slipped 4.63%. European benchmarks were also mostly in the red: Spain’s IBEX 35 was 1.93%; Germany’s DAX, 1.71%; the FTSE Eurofirst 300, 1.55%. The United Kingdom’s FTSE 100 tumbled 5.75% last month. France’s CAC 40 lost just 0.56%. Two losses to note in South America: Brazil’s Bovespa declined 0.67%, and Argentina’s Merval slid 41.49%.10,11
COMMODITIES MARKETS
At the closing bell on the month’s last trading day (August 30), an ounce of gold was worth $1,529.20 on the New York Mercantile Exchange; an ounce of silver, $18.48. Gold gained 7.76% in August, and silver, 12.92%. Another key precious metal, platinum, advanced 6.86%. One of the world’s key semi-precious metals, copper, fell 4.43% last month.12
West Texas Intermediate crude oil ended August at $55.16 per barrel on the NYMEX, down 4.72% on the month. The value of unleaded gasoline fell 19.68%. Heating oil lost 6.42%, but natural gas increased 1.83%. Turning to crops, losses were prevalent: soybeans lost 0.61%; coffee, 5.23%; cotton, 6.86%; wheat, 7.50%; cocoa, 7.53%; sugar, 8.19%; corn, 10.81%. The U.S. Dollar Index rose 0.41% for the month to 98.92.12,13
REAL ESTATE
Mortgage rates went lower in August, influenced by declining bond yields. In Freddie Mac’s August 29 Primary Mortgage Market Survey, the interest rate for the average 30-year, fixed-rate home loan was 3.58%. A 15-year, fixed-rate home loan carried an average interest rate of 3.06%. Back on August 1, they were respectively at 3.75% and 3.20%.14
30-year and 15-year, fixed-rate mortgages are conventional home loans generally featuring a limit of $484,350 ($726,525 in high-cost areas) that meet the lending requirements of Fannie Mae and Freddie Mac, but they are not mortgages guaranteed or insured by any government agency. Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.
As for home buying, the National Association of Realtors said that existing home sales improved by 2.5% in July, a nice change from the 1.3% (revised) retreat of June. According to the Census Bureau, new home sales fell 12.8% during July, as opposed to a 20.9% climb a month earlier.4
The latest 20-city S&P/Case-Shiller Home Price Index (June) measured 2.1% year-over-year home price appreciation, down from 2.4% in the prior edition. Housing starts fell 4.0% in July, but the Census Bureau did report an 8.4% increase for building permits.4
T I P O F T H E M O N T H
Some insurers are now offering usage-based auto insurance. If you happen to drive less than 10,000 to 15,000 miles a year, you may be eligible for a discount on your policy.
LOOKING BACK, LOOKING FORWARD
August was notable for its volatility. The S&P 500 gained or lost 1% during nine of the first 17 trading days of the month. (Back in 2017, there were eight such trading sessions all year.)15
All three of the major U.S. equity indices lost ground last month. The S&P ended August at 2,926.46; the Dow Jones Industrial Average, at 26,403.28; the Nasdaq Composite, at 7,962.88.16-18
| MARKET INDEX | Y-T-D CHANGE | 1-MO CHANGE | 2018 |
| DJIA | +13.19 | -1.72 | -5.63 |
| NASDAQ | +20.01 | -2.60 | -3.88 |
| S&P 500 | +16.74 | -1.81 | -6.24 |
| BOND YIELD | 8/30 RATE | 1 MO AGO | 1 YR AGO |
| 10 YR TREASURY | 1.50 | 2.02 | 2.86 |
Sources: cnnbusiness.com, wsj.com, treasury.gov – 8/30/1916-20
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year Treasury yield = projected return on investment, expressed as a percentage, on the U.S. government’s 10-year bond.
With the third quarter about to give way to the fourth, investors are mulling a few questions. Can the U.S-China tariff fight be resolved this year or next? Is the economy actually showing signs of decelerating? Will Treasury yields stabilize? What will the Federal Reserve do? The answers to some of these questions may take months to surface. This month, Wall Street may see more of the choppiness that characterized August. The market is still a few weeks away from the next earnings season, so fundamental economic indicators (hiring, consumer spending, consumer confidence, manufacturing and service sector growth, retail sales) may exert some influence on stocks. Investors worldwide are waiting to see what direction the Fed will take with interest rates when it meets on September 17-18.
Q U O T E O F T H E M O N T H
“The whole point of being alive is to evolve into the complete person you were intended to be.”
OPRAH WINFREY
UPCOMING RELEASES
Here are the major scheduled news items and events for the rest of the month: the August ADP employment report and Challenger job-cut report (9/5), the Department of Labor’s latest monthly jobs report (9/6), the August wholesale inflation numbers (9/11), the August consumer inflation reading (9/12), August retail sales and the preliminary September University of Michigan Consumer Sentiment Index (9/13), the next Federal Reserve monetary policy announcement and subsequent press conference, plus numbers on August housing starts and building permits (9/18), August existing home sales (9/19), the Conference Board’s September Consumer Confidence Index (9/24), August new home sales (9/25), August pending home sales and the federal government’s third estimate of second-quarter economic expansion (9/26), and then August consumer spending and durable goods orders, plus the final September University of Michigan Consumer Sentiment Index (9/27).
T H E M O N T H L Y R I D D L E
During what month do people sleep the least, on average?
LAST MONTH’S RIDDLE: I am very strong and tough, but never rigid. I can be broken, but only in a certain sense. What am I?
ANSWER: Your heart.
Guy Woolley may be reached at 415-236-5364 or guy@freedomcapitalmanagement.com
www.freedomcapitalmanagement.com
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