Hope On/Hope Off | The WMA Weekly Market Wrap

September 11, 2019
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The post-WWII economic order was built on ever-increasing global integration, but that is changing – here in the U.S. (where President Trump opposes it vehemently), in China, (which seems willing to try to deal the U.S. out over the long-term and which seems to want Hong Kong out of the global order), Great Britain (where roughly half the country wants to leave the EU, even if they can’t agree how), and elsewhere. Irrespective of how this plays out, individually and in the aggregate, there is no precedent in modern history for how — or even whether — the global economy can cope with its opposite.

Implicitly, at least, the capital markets seem to be conceding that this question should be top of mind since news about it has been the leading market-mover for weeks now. The default setting seems to be status quo focused in that any hint of a possible settlement, no matter how ill-founded or far-fetched, moves stocks higher while bad news about settlement prospects is carefully parsed for reasons to discount it.

That said, there are some good reasons for liking the U.S. markets. At 1.55 percent on Friday, the benchmark 10-year U.S. Treasury note yield is remarkably high compared to yields available overseas, making U.S. fixed income markets attractive. That the 10-year Treasury yield is below the S&P 500 dividend yield (1.90% during Q2-2019) is a very good reason to remain bullish on domestic stocks. Moreover, the forward earnings yield of the S&P 500, at 6.06 percent during August, is even more outstanding compared to the fixed income yields.

Domestic stocks recorded a second consecutive week of solid gains last week, as optimism again grew that progress will be made in the U.S.-China trade dispute. The large-cap S&P 500 moved within 2 percent of its July 26 record high, while the smaller-cap indexes remained well off their 2018 peaks.

Within the S&P 500, energy shares outperformed as oil prices rose in response to falling U.S. inventories and Iran’s announcement that it was scaling back its commitments under the nuclear deal negotiated in 2015. Tech shares were also strong, aided by a rise in semiconductor shares. Utilities stocks lagged as longer-term bond yields increased, making their typically above-average dividends less attractive in comparison. Potential for infrastructure damage from Hurricane Dorian may have also discouraged some.

Another factor driving stocks was some favorable economic data. U.S. productivity rose more than expected in the second quarter, and factory orders jumped 1.4 percent in July, their best gain in nearly a year. The Institute for Supply Management’s gauge of service sector activity also rose more than expected.

The rest of the week’s economic data were more mixed. The ISM’s gauge of manufacturing activity, released Tuesday, moved into negative territory in August for the first time since 2016. August payroll gains, reported Friday, were fine but less than expected. Overall payrolls rose by 130,000 versus consensus expectations for a gain of 160,000, while private sector employers added only 95,000 jobs. Average hourly earnings rose a healthy 0.4 percent in the month, however, and the labor force participation rate moved back to the multi-year high (63.2%) it had reached at the start of the year. Friday’s jobs data seemed to weigh a bit on bond yields, and trade hopes helped push Treasury yields higher for the week as a whole.

European stock markets experienced one of their best weeks since June. The pan-European STOXX Europe 600 rose almost 2 percent. Chinese stocks unequivocally posted their best weekly performance since June, and Japan traded higher too.

From the headlines…

U.S. employers added 130,000 jobs in August while the jobless rate held steady at 3.7 percent.

CEOs, central bankers and money managers say they’re operating in a world where they have no idea what’s coming next, leaving them with few options but to prepare for the worst. Uncertainty about a handful of unprecedented phenomena — the grinding trade war with China, the ever-changing Brexit debate and President Trump’s government-by-tweet — is inflicting pain on the global economy and making decision-makers very nervous.

The U.S. and China said last week that talks to end their trade war would resume next month. The escalating trade war between the U.S. and China is rippling through the global economy. Before September 1, goods such as clothing and shoes had been spared from the tariff war with China. Not anymore. Uncertainty over trade policy is likely to reduce U.S. economic output by more than 1 percent through early 2020.

As the U.S., U.K., and China are all putting up trade barriers, protectionism abounds. “Everywhere the trend seems the same. Except in Africa.”

The dollar reached its strongest level in over two years as the gloomy outlook for global growth, rising U.S.-China trade tensions and political turmoil in Europe weighed on major currencies world-wide.

The Fed delivered the first non-unanimous rate decision of Chair Jerome Powell’s tenure in June and in July it saw two dissenting votes. The increasing polarity of opinions on the Fed does not bode well for a central bank facing an unprecedented era in monetary policy and weakening U.S. and global economic data.

Taking advantage of low, low rates, U.S. companies issued $74 billion of investment-grade bonds last week, the most for any comparable period since records began in 1972. That was nearly double the previous record of $40 billion set in 2013.

“The consumer is now carrying all of the weight, or much of the weight” of the U.S. economy’s growth, New York Fed president John Williams said.

The Federal Reserve released its “beige book,” that said most U.S. businesses remain optimistic despite concerns over tariffs and trade.

The U.S. manufacturing sector shrank for the first time in three years last month, the latest sign that trade tensions and cooling global growth are weighing on the American economy.

Corporate profits are down, but wages are up.

Truck makers are logging sharply lower orders, adding another stress point for a decelerating U.S. manufacturing sector.

The world is aging fast. By 2035, Americans aged 65 and older will make up 21 percent of the population, outnumbering those under 18. It’s a trend being replicated in many countries all over the world, driven by lower fertility rates and longer lives.

The nuclear family, religious fealty, and national pride – family, God, and country – are a holy trinity of American traditionalism. The fact that allegiance to all three is in precipitous decline tells us something important about the evolution of the American identity.