Monday Market Review October 7,2019
Economic data during the week included weaker-than-expected ISM manufacturing and services reports, in addition to a contractionary Chicago PMI. The employment situation report was mixed, with payrolls coming a bit below expected, but the unemployment rate fell to multi-decade lows.
World equity markets lost ground as concerns over global manufacturing slowdowns and economic weakness held back sentiment in the U.S. and abroad. Bonds, as usual, benefitted as rates fell in response. Commodities lost ground due to demand fears pulling down crude oil prices to their lowest levels in several months.
U.S. stocks fared poorly early last week, before recovering somewhat by Friday—however, the net result was still in the red.
During the early part of the week, stocks slid due to the weaker-than-expected ISM manufacturing report, coupled with the World Trade Organization’s decision to allow the U.S. to pursue additional tariffs on specific goods from Europe, which appeared to exacerbate broader global trade tensions. These tariffs, which could amount to up to $7.5 bil./year, on items such as single-malt Scotch, French wine, and other items up to 25%, were based on an allowed retaliation for inappropriate monies European governments provided to Airbus (whose products will also be subject to tariff).
While the Presidential impeachment inquiry has not been noted as a significant source of equity volatility specifically, the indefinite timeline and overhang of uncertainty and potential outcome could be another source of background negativity in the near-term, absent a concrete resolution (Senate vote, etc.).
By sector, information technology and health care led with gains of a percent each on the week, while energy and materials declined with losses of several percent. Health care stocks benefitted from a plan to establish a trust (similar to that done for tobacco years ago), which could shield several manufacturers from further liability in the opioid crisis. This removes one open-ended point of uncertainty for several healthcare firms which have been sued in local courts for either manufacturing or distributing opiates around the country. For the third quarter overall, when measured by ‘factors,’ minimum volatility and quality fared best, which is in keeping with the trade woes story; value and momentum each fared positively but to a lesser degree.
Foreign stocks were also down, with Europe and U.K. faring worse than Japan. The U.K. manufacturing PMI fell below 50, which raised fears of recession, on top of seemingly never-ending concerns over Brexit’s conclusion. The German services sector also contracted, which added to already-poor results in the manufacturing segment, and ongoing negative sentiment surrounding trade. Chinese stock markets, a key driver of EM sentiment, were closed for the 70th anniversary of the current communist regime. Other markets on net were slightly negative, with weakness in Brazil due to delays in pension reform, India and other Asian nations due to continued poor sentiment driving global flows generally. Overall, it appears that recent economic data, especially in manufacturing, has been consistently slowing around the world—which explains the closer correlations in returns between domestic and foreign equity markets, not to mention central bank policy.
U.S. bonds fared well again, as economic worries stoked demand for fixed income, pushing down interest rates across the yield curve. Oddly, the 10y-2y curve remains positively sloped, while the 10y-3m curve remains fairly strongly inverted (with an implied rate cut in October, which would re-flatten the curve by this measure). Long treasuries, as expected, fared best, while high yield corporates and floating rate bank loans lost ground on the week. Developed market foreign bonds were generally flat in local terms, but were improved by a weaker dollar. Emerging market bonds fared a bit better, with gains in local and USD terms.
Commodities generally declined on the week, despite a weaker dollar, with losses in energy and industrial metals offsetting gains in ag and precious metals. The price of crude oil fell by over -5% to a shade below $53/barrel—the lowest price level in several months. Fears over economic slowing tend to threaten demand on top of concerns over short-term supply being recently alleviated, which has tipped the balance.
The ISM manufacturing index for September fell by -1.3 points to 47.8, disappointing compared to consensus expectations calling for a return back up to a neutral 50.0, and representing the weakest reading in ten years. Under the hood, new orders ticked up slightly but remained in contraction, while production and employment continued to drop further into contraction, as did inventories. Prices paid rose a bit, but remained below 50. This was obviously a sub-par result, as 15 of 18 industries reporting a contractionary results—with financial markets reacting negatively. The index, which is based on sentiment levels of respondents as opposed to pure production data, has no doubt been negatively influenced by a slowdown in global economic growth and weakness caused by U.S.-China trade issues. The question remains as to whether or not this lengthening manufacturing slump is a ‘mid-cycle’ slowdown, as the Fed has portrayed, or is morphing into a deeper decline, as recession mongers fear.
Ryan Long, CFA, Director of Investments, Focus Point Solutions
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor. Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.