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Stocks Inch Toward Record Highs For the week of September 16, 2019

Key Market Data

09/06/2019 09/13/2019 One Week Change YTD One Year
S&P 500 Index 2,978.71 3,007.39 +0.96% +21.73% +5.69%
MSCI EAFE Index 1,882.43 1,919.61 +1.98% +14.92% +3.13%
Barclays Capital U.S. Aggregate Bond Index 2,229.46 2,192.49 -1.66% +7.13% +8.62%
10-year Treasury Note Rate 1.561% 1.898% +33.7 basis points -78.7 basis points -107.3 basis points

Midway through September, investors seem to have shaken off the concerns that drove stocks and bond yields south in August. In fact, the major indexes are now on a three-week winning streak and closing in on the record highs thanks to some concessions in the trade war and the prospect of a rate cut by the Federal Reserve this week. At the same time, the yield on the 10-year Treasury, which had been flirting with its all-time low earlier this month, posted its biggest weekly rise since 2013 and closed last week at 1.898 percent.

The trade war

With the trade war weighing on investors and taking a toll on the global economy, both sides unexpectedly gave some ground last week, which helped propel stocks and bond prices. The Chinese said (not for the first time) that they were planning to buy American agricultural goods and added that they won’t raise tariffs on a range of those goods. President Trump said he will delay the next round of higher tariffs to Oct. 15 from Oct. 1 so as not to cloud the 70th anniversary of the founding of the People’s Republic of China on the first of next month. The two sides are scheduled to return to the bargaining table in October.

The ECB and the Fed

The European Central Bank surprised investors by the extent of the action it took to offset an economic slowdown in the Eurozone. The ECB’s moves last week leave it with few options for the future.

To encourage loans, the ECB lowered the rate it charges commercial banks for the cash they hold from -0.4 percent to -0.5 percent, and also made it easier for banks to borrow. In addition, the ECB restarted the bond-buying program it ended just nine months ago, pledging to buy €20 billion ($22 billion) a month starting in November.

The ECB’s outgoing President Mario Draghi also encouraged nations “with fiscal space,” meaning Germany and the Netherlands, to spend more to stimulate the Eurozone’s economy, a strategy that his successor Christine Lagarde has also promoted. President Trump said the ECB was “trying and succeeding, in depreciating the Euro against the VERY strong dollar, hurting U.S. exports,” and Trump again denounced the Fed, which he said, “sits, and sits, and sits.” The Fed will meet on Tuesday and Wednesday and is widely expected to lower its rate for the second time this year.

The trillion-dollar deficit

The government announced that the deficit for the first 11 months of the fiscal year exceeded $1 trillion for the first time since 2012 as spending continues to outpace revenues. Through August, the deficit was up 18 percent from a year earlier and added up to 4.4 percent of GDP. In a sign that the outsized deficit may be here to stay, Treasury Secretary Steven Mnuchin said the government is thinking about taking advantage of low interest rates to issue a 50-year, and perhaps even a 100-year bond (the 30-year is currently the bond with the longest duration). This came not long after Trump enjoined the Fed to cut its rate to “ZERO” adding, “We should then start to refinance our debt.”

The attacks on Saudi Arabia

Oil prices are expected to spike after a series of drone attacks in Saudi Arabia this weekend. The attacks set off fires that forced the Saudis to shut down half of the country’s oil output. Saudi Arabia is the world’s biggest oil exporter and produces about 5 percent of the world’s daily total. The Saudis blamed the Houthis, Yemen’s rebel forces that they have been at war with. The United States said it believes Iran was behind the attacks, a charge the Iranians rejected. In either case, some analysts think the attacks will raise oil prices by as much as $10 a barrel.

Brexit

Great Britain’s Parliament has thwarted Prime Minister Boris Johnson’s plan to leave the Eurozone without a deal and to hold early elections that might have strengthened his hand. In addition, the British government released a “worst case” report last week that said that a no-deal Brexit could lead to food and prescription drug shortages, high gas prices, and long delays at border crossings. Even so, Mark Carney, the Governor of the Bank of England, said, “The core of the financial system is ready for Brexit.” Mr. Johnson is meeting with the European Commission today in an effort to revise the deal that Parliament has rejected more than once.

In other news, retail sales were up a better-than-expected 0.4 percent in August from July and July’s sales were revised to 0.8 percent from the original 0.4 percent. The government said there were 7.2 million job openings in July, down 31,000 from June and off 3 percent from a year earlier. However, for the 17th month in a row, the number of openings exceeded the number of job seekers by more than one million. The Census Bureau reported that median household income was up 0.9 percent in 2018 from the year before to $63,179. Import prices fell 0.5 percent in August thanks to lower prices for food and oil. Wholesale inventories advanced 0.2 percent in July from June to $679.1 billion. The producer price index rose 0.1 percent in August from July and 1.8 percent for the past 12 months; core PPI, less food and energy, was up 0.3 percent and 2.3 percent, respectively. The consumer price index increased 0.1 percent in August from July and 1.7 percent for the year; core CPI rose 0.3 percent for the month and 2.4 percent for the year. First-time jobless claims for the week ending Sept. 7 fell 15,000 to 204,000l; the four-week moving average declined 4,250 to 212,500. And yesterday the United Workers’ Union called for 46,000 GM employees to go on strike for the first time since 2007 after negotiations with management over wages, benefits, and reopening closed plants stalled.

A look ahead

This week’s highlight will be the Fed’s two-day meeting at which it’s expected to again cut its rate, but there will also be updates on industrial production and capacity utilization, building permits and housing starts, the current account balance, consumer comfort, the Conference Board’s leading index, and existing home sales.

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.