Sept. 27, 2019 Market Update for the Month Ending August 31, 2019
All major U.S. indices declined in August. The Dow Jones Industrial Average (DJIA) fell by 1.32 percent, the S&P 500 lost 1.58 percent, and the Nasdaq Composite declined 2.46 percent.
Despite the volatility, fundamentals improved in August. S&P 500 earnings grew by 2.2 percent in the second quarter, driven by strong earnings growth in the health care and communication sectors.
Looking at technicals, the S&P 500 and Nasdaq Composite spent the month above their trend lines, but the DJIA did not. It fell below its 200-day moving average for two days midmonth, although it did recover. A sustained drop below the 200-day moving average could mean a shift in investor sentiment. So, the DJIA’s recovery was a positive sign.
International markets had a volatile August. The MSCI EAFE Index fell by 2.59 percent, on uncertainty surrounding Brexit and a slowdown in eurozone countries. The MSCI Emerging Markets Index fell 4.85 percent, on slowing growth figures from China and political uncertainty in South America. Both indices spent most of August below their 200-day moving averages.
Investment-grade fixed income had a strong month. The 10-year Treasury yield started August at 1.90 percent and declined to 1.50 percent. This drop helped the Bloomberg Barclays U.S. Aggregate Bond Index return 2.59 percent. The Bloomberg Barclays U.S. Corporate High Yield Index returned 0.40 percent.
Political risks take center stage
Political developments dominated the headlines. President Trump announced a 10 percent tariff on $300 billion of Chinese imports. China then announced its own tariffs and halted purchases of U.S. agriculture by Chinese companies.
President Trump also questioned whether the Federal Reserve should be more aggressive on interest rates and rattled markets by tweeting that American companies should remove themselves from China. Finally, the prospect of a no-deal Brexit hit international markets hard.
Economy continues to grow
The U.S. economy remained positive, driven by strong consumer spending. July’s retail sales showed 0.7 percent growth, and core sales came in with 0.9 percent growth. Consumer spending was a major driver for second-quarter growth.
Spending was supported by strong consumer confidence. The Conference Board Consumer Confidence Index fell from 135.8 in July to 135.1 in August, a better-than-expected result. The present situation part of the index hit levels last seen in the late 1990s (see Figure 1).
Figure 1. Consumer Confidence Present Situation Index, 1999–2019
Consumer sentiment and spending were also positive, which was good news for the housing market. July’s existing home sales report showed sales increased on a year-over-year basis for the first time since February 2018. Lower rates likely played a part, as mortgage applications jumped in June when rates fell in May.
Business data a mixed bag
Businesses were not as confident as consumers in August. The Institute for Supply Management (ISM) Manufacturing and Nonmanufacturing indices both declined. Manufacturing output fell by 0.4 percent, leading to a 0.2 percent loss in industrial production.
Durable goods orders came in with 2.1 percent month-over-month growth in July. Core durable goods orders, which strip out transportation orders, fell by 0.4 percent. This result indicates that the decline in business confidence may have slowed business spending and investment.
Risks remain but fundamentals are solid
Politics and headlines can hurt markets in the short term. But a solid economy can cushion those declines. Consumer confidence and spending levels remain high. Consumer spending is the most powerful factor in the economy and can continue to drive U.S. economic expansion.
The U.S.-China trade war remains a concern, especially its potential impact on business confidence and spending. Consumers have kept the economy rolling, but there may be a limit to how much they can do. An acceleration in business spending would be welcome.
Abroad, Brexit and slowing growth in the eurozone could lead to volatility. Here at home, the 2020 presidential elections may become a source of turbulence.
Given the risks, we will likely see further volatility this year. A well-diversified portfolio and a long-term view toward investing remain the best way forward in a volatile world.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.
© 2019 Commonwealth Financial Network®