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Trade Uncertainty Drives Markets in August For the week of September 3, 2019

Key Market Data

08/23/2019 08/30/2019 One Week Change YTD One Year
S&P 500 Index 2,847.11 2,926.46 +2.79% +18.34% +2.94%
MSCI EAFE Index 1,826.73 1,842.58 +0.87% +10.21% -3.34%
Barclays Capital U.S. Aggregate Bond Index 2,228.11 2,232.89 +0.21% +9.10% +10.21%
10-year Treasury Note Rate 1.536% 1.498% -3.8 basis points -118.7 basis points -135.8 basis points

The last week of August was much like the first three for the stock market, seemingly driven sharply up and down by every tweet and rumor about the course of America’s trade war with China. On the plus side, the major indexes finished up, breaking a four-week losing streak, but they were still off for the month. The Nasdaq dropped 2.5 percent, the S&P 500 1.6 percent and the Dow 1.3 percent. Despite the losses in August, all three indexes are still up significantly in 2019. The volatility that impacted stocks in August left investors looking for safe havens, leading the yield on long-term bonds to briefly fall below that of short-term Treasuries more than once. Some see the so-called “yield curve inversion” as a sign of an impending recession. Overall, the yield on the 10-year Treasury had its biggest monthly drop since 2011 and the yield on the two-year suffered its steepest decline since 2008. Meanwhile, the yield on the 30-year fell to a record low in August. The price of gold rose 7.5 percent last month and is up 19 percent for the year.

The week began with threats from President Trump to raise tariffs on Chinese goods — the president also ordered American companies to stop doing business in China. However, before the stock market opened on Monday, Mr. Trump changed his tone and had kind words for China’s President Xi Jinping. He also said that Chinese officials had reached out to try and restart negotiations, which the Chinese have denied. Regarding the mixed signals about the status of the trade war and his strategy, Mr. Trump said, “Sorry. It’s the way I negotiate. It’s done very well for me over the years, and it’s doing even better for our country.”

Stocks finished up on four of the week’s trading days after positive news about the trade war, including China’s Commerce Ministry saying that the two sides were in “effective communication” and would likely meet this month. Even so, on Sunday the latest round of tariffs against China went into effect, 15 percent on about $110 billion in goods. The next round is scheduled to start on Dec. 15, at that time almost everything China sells in the United States will be subject to a tariff. China, on the same dates, will introduce higher tariffs on a variety of American goods, including cars, oil and agricultural produce.

The trade war’s toll

In one indication of the trade war’s impact, China, long our main trading partner, is now number three after Mexico and Canada. And the University of Michigan said the sharp decline in consumer sentiment in August was due to the uncertainty of the trade war. The index fell to 89.8 from July’s 98.4, the biggest monthly drop since December 2012. In sharp contrast, the “present situation” reading for the Conference Board’s consumer confidence hit its highest point since November 2000. Late last week, President Trump pushed back against American businesses that have been complaining about the impact of the trade war, saying those companies are “badly run and weak” and are “smartly blaming these small Tariffs instead of themselves for bad management.”

Consumer spending surges

With all the uncertainty about the trade war, there was some positive news about the American economy last week: consumers are spending. First, the government released its latest estimate for second-quarter GDP, and while the estimate fell to 2 percent from 2.1 percent, consumer spending, which accounts for two-thirds of GDP growth, was up to a revised 4.7 percent, the best showing since the last quarter of 2014. In addition, consumer spending rose a better-than-expected 0.6 percent in July from June.

Boris and the Brexit

While saying that he’s still negotiating with the European Union, Prime Minister Boris Johnson moved last week to close Parliament for most of September so that it would not pass legislation preventing him from a “no-deal” Brexit. The move didn’t sit well with his political opponents. As it stands, Great Britain will leave the EU, deal or no, Oct. 31.

Order in Italy?

A week after Italy’s Prime Minister Giuseppe Conte resigned to fend off a power grab from his coalition partner Matteo Salvini, the leader of the hard-right League party, Italy’s President, Sergio Mattarella, authorized Mr. Conte to form a new ruling coalition that will apparently leave Mr. Salvini on the outside looking in.

Opioids in court

With more than 2,000 cases related to opioids pending nationwide, a judge in Oklahoma fined Johnson & Johnson $572 million for misleading marketing about opioids; the state had asked for more than $17 billion. The company says it will appeal the ruling. Meanwhile, Purdue Pharma offered to pay from $10 billion to $12 billion to settle cases about its opioid business, a figure that some of the state attorney generals involved dismissed as inadequate.

In other news, the personal consumption expenditures index advanced 0.2 percent in July from June and 1.4 percent from a year earlier; the core PCE index, excluding food and energy, was up 0.2 percent month over month and 1.6 percent from July of 2018. The S&P CoreLogic Case-Shiller home price index rose 3.1 percent in June from a year earlier after a gain of 3.3 percent in May. The National Association of Realtors said that pending home sales fell 2.5 percent in July from June and fell 1.7 percent from a year earlier. Retail inventories increased 0.8 percent in July from the month before. The Conference Board’s consumer confidence index was 135.1 in August compared to 135.8 in July. And first-time jobless claims for the week ending August 24th rose 4,0000 to 215,000; the four-week moving average dipped 500 to 214,500.

A look ahead

This week’s release will include updates on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, the trade balance, the Fed’s Beige Book report, vehicle sales, nonfarm productivity, consumer comfort, orders for durable and capital goods, and the jobless rate for August, expected to remain unchanged at 3.7 percent.

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