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Financial Markets Commentary For the week of August 5, 2019

Key Market Data

07/26/2019 08/02/2019 One Week Change YTD One Year
S&P 500 Index 3,025.86 2,932.05 -3.10% +18.32% +5.83%
MSCI EAFE Index 1,914.68 1,863.85 -2.65% +11.12% -2.29%
Barclays Capital U.S. Aggregate Bond Index 2,171.34 2,192.69 +0.98% +7.14% +9.00%
10-year Treasury Note Rate 2.071% 1.847% -22.4 basis points -83.8 basis points -114.0 basis points

Investors took a one-two punch that sent stocks reeling. The S&P 500 posted its worst week since December, down 3.1 percent. The first blow came on Wednesday when it seemed that the Federal Reserve’s widely expected rate cut, the first since 2008, was more likely to be a one-off rather than the first in a series of cuts. Then on Thursday, as stocks were recovering from that punch, President Trump caught investors off guard when he said he was going to impose a new round of tariffs on $300 billion in Chinese goods on Sept. 1. Investors fled stocks, instead looking to the safety of bonds. In fact, by the end of the day on Friday, the yield on the 10-year U.S. Treasury had fallen to its lowest level since the day before the presidential election in 2016.

The Fed Comments

The Fed’s decision to cut its key rate a quarter point to a range of 2 to 2.25 wasn’t surprising. What did concern investors was Powell’s description of the cut as a “mid-cycle adjustment.” He later qualified his statement, saying, “It’s not the beginning of a long series of rate cuts — I didn’t say it’s just one.”

Two board members voted to leave the rate unchanged, the most “no” votes at a meeting since Mr. Powell took the helm in February of 2018. President Trump, who has been critical of the Fed’s policymaking and who had lobbied for a bigger cut, tweeted, “As usual, Powell let us down.”

The Trade War Escalates

The real surprise last week was the announcement of new tariffs, which reportedly came over the objections of some of the president’s chief advisors, including Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer, who have been spearheading the negotiations with China. The two returned to Washington last week after the latest session with China was fruitless, though both sides hailed it as “constructive.”

Trump, apparently annoyed at the lack of progress and upset that China has reneged on a promise to buy more U.S. agricultural goods, responded with the tariff threat. If they go into effect, virtually everything China sells in America would be taxed at a higher rate. That includes laptops, cellphones and toys. “Until such time as there is a deal, we’ll be taxing them,” Trump said, later adding, “If they don’t want to trade with us anymore, that would be fine with me.” China said it would retaliate, though it remains to be seen what action it will take. On the plus side, the president said he was working to close trade deals with Japan and the European Union covering agricultural produce and beef, respectively.

Jobs in July

There was some positive economic news late last week, but not enough to stop the stock market’s slide. On Friday, the government announced that 164,000 new jobs had been created in July while the jobless rate remained unchanged at 3.7 percent. Wages were up 3.2 percent from a year earlier and the total labor force rose to 163.4 million, a new high.

The Budget Deal and New Debt

The Senate followed in the footsteps of the House by approving a two-year spending deal that will increase discretionary spending by $320 billion over the next two years to a total of $2.7 trillion and raise the debt ceiling until 2021. As was the case in the House, Republicans were split over the bill, which some saw as fiscally irresponsible; the tally was 67 to 28 with 23 GOP senators voting “nay.” President Trump, who supported the bill, signed it into law on Friday. The government also announced that it’s going to borrow more than $1 trillion this year for a second year in a row, issuing $814 billion in debt in the second half of 2019 to bring the total for the year to $1.23 trillion after $1.34 trillion in 2018 (and $546 billion in 2017).

The Brexit and the Bank of England

The pound fell against the euro last week after Britain’s new Prime Minister Boris Johnson said he won’t meet with European Union leaders unless they agree to change the Brexit agreement. Johnson’s comments raise the prospect of a no-deal Brexit as EU leaders have said they won’t renegotiate. The Bank of England left its rate unchanged but lowered its forecast for growth for 2019 and 2020 because of what it described as “volatile” data and “intensifying Brexit-related uncertainties.”

In other news, the Institute for Supply Management’s index of manufacturing activity fell for the fourth month in a row, dipping to 51.2 in July from June’s 51.7. Even so, the index remained above 50, which indicates expansion, for the 35th consecutive month. Factory orders were up 0.6 percent in June from the month before; orders ex-transportation advanced 0.1 percent. Personal consumption expenditures rose 0.3 percent in June from May, while the PCE price index was up 0.1 percent and 1.4 percent year over year; the core PCE index, less food and energy, climbed 0.2 percent for the month and 1.6 percent for the year. Personal income increased 0.4 percent in June from the month before, while personal spending increased 0.3 percent. The trade deficit narrowed to $55.2 billion in June from May’s $55.3 billion as imports fell 1.7 percent while exports were down 2.1 percent. The S&P CoreLogic Case-Shiller home price index was up 3.4 percent in May from a year earlier, down from 3.5 percent in April. The National Association of Realtors said that pending home sales rose 2.8 percent in May and were up 1.6 percent from a year earlier, the first year-over-year increase in 17 months. Construction spending fell 1.3 percent in June from May and was down 2.1 percent from June of 2018. The Conference Board’s consumer confidence index rose to 135.7 in July from 124.3 in June, and the University of Michigan’s reading for consumer sentiment in July was 98.4 after June’s 98.2. Lastly, first-time jobless claims for the week ending Jul. 27 rose 8,000 to 215,000; the four-week moving average dropped 1,750 to 211,500.

A Look Ahead

This week’s short list of updates will include the latest on the ISM’s nonmanufacturing index, job openings, consumer credit, wholesale trade, and the producer price index.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.