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What Caused Last Week’s Market Volatility? For the week of August 19, 2019

Key Market Data

08/09/2019 08/16/2019 One Week Change YTD One Year
S&P 500 Index 2,918.65 2,888.68 -1.03% +16.73% +3.77%
MSCI EAFE Index 1,840.48 1,811.86 -1.56% +8.28% -2.31%
Barclays Capital U.S. Aggregate Bond Index 2,205.23 2,226.25 +0.95% +8.78% +10.02%
10-year Treasury Note Rate 1.746% 1.555% -19.1 basis points -113.0 basis points -131.2 basis points

Concern about the impact of an expanding trade war sent the stock market to its worst day of the year Wednesday. The Dow plunged 800 points or 3.05 percent. Despite rebounding on Thursday and Friday, the major indexes were off at least 1 percent for the week. Volatility was the norm with the Dow rising or falling at least 300 points on four of the five days of trading. Not surprisingly, some investors looked to safe havens. In fact, the yield on the 10-year Treasury briefly fell below that of the two-year during intraday trading last week for the first time since 2007. The so-called “inverted yield curve” is seen as a harbinger of a recession. However, U.S. GDP is still expected to be up at least 2 percent in 2019 and the jobless rate remains near its lowest level in a half-century.

Last week started down on a myriad of headlines. The worries included President Trump’s threat to introduce a new round of tariffs on $300 billion in Chinese goods on Sept. 1, ongoing protests in Hong Kong and political instability in Italy and Argentina. Stocks rebounded on Tuesday after Trump said that the new tariffs on some goods — including smartphones, computers, and toys — would be postponed until Dec. 15 so that they won’t impact the holiday season. But on Wednesday, the dam broke when Germany said its economy had contracted in the second quarter, down 0.1 percent, and China announced that industrial production advanced 4.8 percent in July from a year earlier, the smallest year-over-year gain since 2002. During the day, the yield on the 10-year Treasury fell below 1.6 percent and the yield on the 30-year dipped to a new all-time low. Some analysts think that Germany, Europe’s largest economy, may see its GDP shrink in the third quarter as well, which would officially constitute a recession (defined as two consecutive quarters of GDP contraction). Germany has also lowered its forecast for growth this year to 0.5 percent compared 1.5 percent in 2018. Even so, investors were encouraged at week’s end by a report that the German government was ready to invest to spur growth and the fact that GDP for the Eurozone as a whole, Germany included, was up 0.2 percent in the second quarter.

Stocks were further buffeted on Thursday by conflicting statements from China. In one, a tariff commission spokesman threatened that the new tariffs would lead to “necessary countermeasures.” However, another statement from the foreign ministry said it hoped China and the United States could “work out a mutually agreeable solution.” The day ended on the upswing, largely because of upbeat second-quarter earnings from Walmart and positive retail sales, which were up a better-than-expected 0.7 percent in July from June. In addition, the Atlanta Fed raised its estimate for third-quarter GDP from 1.9 percent to 2.2 percent.

Powell to Speak

President Trump has continued to blame the Federal Reserve for failing to support the American economy. This week investors will get an update from the Fed and its plans relative to the recent stock market gyrations. The Fed will hold its annual symposium at Jackson Hole, Wyoming, and on Friday its Chairman Jerome Powell will speak and, hopefully, clarify the Fed’s next steps. So far this year, central banks from 30 countries have cut rates in the face of a global slowdown.

The European Central Bank’s (ECB) Next Steps

Speaking of central banks, at the end of October, Mario Draghi will step down as the President of the ECB and be replaced by Christine Lagarde, the head of the International Monetary Fund. It looks as if Draghi is not going to go quietly, but instead take a major step to stimulate growth in the Eurozone. According to one ECB board member, Olli Rehn, the Governor of Finland’s central bank, the ECB will act decisively in September. “It’s important that we come up with a significant and impactful policy package,” he said, because it’s better to “overshoot expectations.” The ECB is expected to cut its rate and recommence the bond-buying program it ended last year.

In other news, industrial production was off 0.2 percent in July from June while manufacturing output dropped 0.4 percent. Capacity utilization was 77.5 percent compared to 77.8 percent in June. Nonfarm productivity was up 2.3 percent in the second quarter after an increase of 3.5 percent in the first quarter. Business inventories were unchanged in July from June. The consumer price index rose 0.3 percent in July from June, while core CPI, less food and energy, advanced 0.3 percent. For the year, CPI was up 1.8 percent and core CPI 2.2 percent. New home construction was down 4 percent In July from June to an annualized rate of 1.19 million. However, applications for building permits, an indicator of future home construction, rose 8.4 percent to an annual rate of 1.336 million. Thanks in part to lower mortgage rates, the National Association of Home Builders/Wells Fargo index of homebuilders’ sentiment increased one point in August to 66, matching its 2019 high. The Fed reported that consumer debt climbed to $13.86 trillion in the second quarter, up 1.4 percent from the first quarter. Because of concerns about the trade war, the University of Michigan’s consumer preliminary sentiment reading for August was 92.1, the lowest reading since January, after July’s 98.4. And first-time jobless claims for the week ending Aug. 10 were up 9,000 to 220,000; the four-week moving average rose 1,000 to 213,750.

A Look Ahead

This week’s releases will include the latest on existing and new home sales, the Conference Board’s leading index, and the minutes of the Fed’s July meeting, at which it raised the benchmark rate for the first time since 2008.

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.