For the week ending September 13
This summary is provided by BMT Wealth Management.
The Dow Jones Industrial Average recorded its eighth consecutive daily gain last Friday, September 13, 2019 and ended the week up +1.65%. Investor risk aversion subsided throughout the week as positive U.S. economic data and easing trade tensions contributed to positive equity performance across major equity indices. U.S. Treasury yields continued their march higher last week regaining much of the decline sustained in August.
We believe that last week’s economic data and market performance are consistent with a fundamentally strong U.S. economy that continues to reflect modest signs of aging given the length of the current economic expansion. Trade uncertainty and weakening growth outside the U.S., we believe, continue to be the primary risks to U.S. economic growth.
This week, all eyes will be on the U.S. Federal Reserve (Fed) when Chairman Jay Powell leads the Federal Open Market Committee in discussions regarding potential changes to U.S. monetary policy. A 0.25% interest rate cut is highly anticipated.
Economic Data: The Fundamentals of the U.S. Economy Remain Strong While Trade Tensions Ease
The U.S. consumer continued to play an important role in the ongoing U.S. economic expansion after recording another solid month of spending in August. Retail sales increased +0.4% during the month after a +0.8% rise in July.
Advance Retail Sales
(December 31, 2018 – August 31, 2019)
Source: Bloomberg Finance L.P.
A healthy labor market is boosting consumer spirits as well as their ability to spend. This has translated into higher levels of consumer purchases throughout the year. The U.S. unemployment rate was 3.7% in August, close to a 50-year low, while annual wage inflation has been steady at 3.0% or higher over the past year.
On the global trade front last week, tensions between the U.S. and China eased after both sides indicated actions that were supportive of compromise and goodwill. Specifically, President Trump announced a two week delay in administering upcoming tariffs on Chinese imports, while China voiced its willingness to purchase U.S. agricultural goods. Furthermore, President Trump acknowledged that an interim trade agreement with China is a possibility while the two sides continue to work through their differences.
Although trade uncertainty continues, the actions were enough to support an equity rally bringing the S&P 500 Index to its third consecutive weekly advance and within 1.0% of a record high.
Equity Market: U.S. Markets Rally, Cyclicals and Small Cap Lead the Way
The S&P 500 Index increased roughly +1.0% last week, led by the financial sector up +3.93%. Higher yields across the yield curve boosted investor expectations for improved bank interest rate margins and bank profitability. On the contrary, the real estate sector, the worst performing sector in the Index down -3.08%, lost its high dividend appeal while investors favored growth or other assets for income.
U.S. small cap equity was the highlight on the week after the Russell 2000 Index returned nearly 5.00%. The pro-cyclical Index notably regained investor popularity even though the Index remains 10% from its record high on August 31, 2018. The Russell 2000 closed the 2019 YTD underperformance gap relative to the S&P 500 Index while both indices remain comfortably in positive territory for the year.
Last week’s equity performance was consistent with a general theme the BMT Investment Team has been closely following that shows investors shifting away from the growth and momentum part of the market and into the more cyclical type companies. In our opinion, demand and valuations were somewhat stretched within the growth space and that some reversion to the mean is acceptable and indicative of a healthy equity market. More to come on this topic as we believe the recent trend has room to continue.
S&P 500 Index and Russell 2000 Index
(December 31, 2018 – September 13, 2019)
Source: Bloomberg Finance L.P.
Overseas, the MSCI Emerging Markets Index returned +1.91% and the MSCI EAFE Index (developed international equity) ended the week up +1.99%. Easing global trade tensions and global central bank policy reported last week were overall broadly supportive for valuations overseas.
Fixed Income Market: Global Bond Yields Spike Higher
Bond yields have reversed course over the past week, increasing across the yield curve. The 2-year and 10-year U.S. Treasury yield increased 26 basis points (+0.26%) and 34 basis points (+0.34%), respectively, and ended last week at 1.80% and 1.90%. Fears of a severe global economic downturn have subsided coinciding with a less dovish tone expected from the Fed when it meets this week.
Regarding central banks, the European Central Bank (ECB) met last Thursday and opened the door to more bond buying, known as quantitative easing, to support European economic growth and inflation. The ECB also increased the deposit rate it charges banks to park excess cash at the ECB. In Germany, the 10-year sovereign debt ended the week at -0.45%, still negative but 19 basis points higher relative to the beginning of the week.
In other U.S. fixed income news, 10-year inflation breakeven increased 13 basis points (+0.13%) to 1.68%, a rising number refers to investors expecting higher inflation in the future, while investor demand for credit outpaced that for U.S. governments, leading to modestly tighter credit spreads.
Week Ahead: Powell Speaks Again
This week, on the economic front, investors will get an update on the U.S. housing market with Housing Starts, Existing Home Sales, and the NAHB Housing Market Index all scheduled to be reported. The highlight will come mid-week when the Fed meets to discuss and report on monetary policy decisions and direction.
We believe a rate cut of 25 basis points is forthcoming and expect Fed Chairmen Jay Powell to justify its easing by acknowledging the U.S. economy remains fundamentally strong although risks remain that warrant actions by the Fed to support the ongoing economic expansion.