For the week ending August 16
This summary is provided by BMT Wealth Management.
Economic Data: Volatility is Picking Up
Volatility in the equity markets has certainly picked up in August as investors consider the likelihood of a global economic recession. This past week, economic data out of China and Germany provided further evidence that global economic growth is slowing while the U.S. consumer continues to be a bright spot for the U.S. economy.
China, the second largest economy after the U.S., recorded its weakest year-over-year (YoY) industrial output growth in roughly 17 years, 4.8% in July 20019 versus 6.3% the prior month. The ongoing trade disputes as well as the economic transformation from manufacturing to a more service-oriented Chinese economy are both weighing on economic activity. It is also worth noting that last month, China reported YoY GDP growth ending in June at 6.2%, its slowest pace going back as far as 1992.
China GDP YoY
(March 31, 1992 – June 30, 2019)
Source: Bloomberg Finance L.P.
In Europe, Germany posted a second quarter GDP contraction of -0.1%. Sluggish manufacturing and export growth have contributed to a stagnant economy. The European Central Bank has voiced its concern regarding weak European economic growth and stands ready to add further monetary stimulus to support the euro zone economy.
In the U.S., the economic picture was much brighter after consumer spending surpassed expectations by increasing +0.7% in July 2019 after a +0.3% increase the prior month. The ongoing trading tensions have yet to deter consumer spending spirits – a positive for the U.S. economy.
Equity Market: Equity Markets Ended the Week Down but on a Positive Note
The S&P 500 Index ended the week down -0.94%, or roughly 5% away from its all-time high. Although negative, the Index regained a substantial portion of its losses on Friday after sustaining its worse loss of the year earlier in the week. Overall, global recession fears and trade tensions continue to contribute to market volatility and uneasy investor sentiment.
Last week, the worst performing sectors within the S&P 500 Index were energy and financials, down -3.34% and -2.14%, respectively. Utilities were the best performing sector up +0.81% as investors searched for high yielding dividend issuers given the decline in bond yields.
Overseas, the MSCI Emerging Markets Index dropped -1.03% and the MSCI EAFE Index (developed international equity) ended the week down -1.44%. For the year, the MSCI EAFE Index is ahead +8.28%.
(December 31, 2018 – August 16, 2019)
Source: Bloomberg Finance L.P.
Fixed Income Market: Yields Descent Lower Continues
U.S. Treasury yields continued their descent lower with the 2-year and 10-year dropping 14bps (0.14%) and 18bps (0.18%), respectively, and ending the week at 1.51% and 1.57%. Although currently positive, for a very brief period earlier in the week, the yield difference between the 10-year and the 2-year U.S. Treasury yield was negative, or in bond jargon terms, inverted.
Also receiving much investor attention in fixed income last week, the 30-year U.S. Treasury hit a record low on Thursday, August 15, 2019 and closed at 1.97%. Low inflation, negative global bond yields, and global economic recession fears have all contributed, in some portion, to the long bond’s strong performance thus far in August.
Week Ahead: Powell Speaks Again
Federal Reserve Chairman Jay Powell will be speaking at the Annual Federal Reserve Policy Symposium in Jackson Hole, on Friday, August 23, 2019. Based on federal funds futures contracts, investors are expecting three more rate cuts this year. It will be interesting to see if Chairman Powell reveals any hints for monetary policy for the remainder of this year.