Chevron left arrow. Market Commentary

Stocks Fall, Despite Fed Rate Cut For the week of September 23, 2019

Key Market Data

09/13/2019 09/20/2019 One Week Change YTD One Year
S&P 500 Index 3,007.39 2,992.07 -0.51% +21.13% +4.18%
MSCI EAFE Index 1,919.61 1,912.66 -0.36% +14.52% +0.05%
Barclays Capital U.S. Aggregate Bond Index 2,192.49 2,211.70 +0.88% +8.07% +10.11%
10-year Treasury Note Rate 1.898% 1.723% -17.5 basis points -96.2 basis points -134.1 basis points

Despite the Federal Reserve rate cut, major indexes finished down for the week as investors grew concerned about the Fed’s next steps and the status of the trade war. Rising tensions in the Middle East didn’t help either as the price of oil spiked following a drone attack on Saudi Arabia’s oil facilities.

After more than a decade without a Fed rate cut, the Fed has now cut its rate twice in 2019, last week by a quarter-point to a range of 1.75 percent to 2 percent. And, despite remaining confident about the trajectory of the American economy and pledging its readiness to act again should growth falter, Fed committee members appeared to disagree about next steps. Three of the Fed’s 10 voting members dissented, the most since 2016, with two pushing for a bigger cut and one for no cut at all.

At his post-meeting press conference, Fed Chairman Jerome Powell said it was “a time of difficult judgments,” but also that, “Our eyes are open, we’re watching the situation.” In addition, he said the Fed could move toward a “more extensive sequence” of rate cuts if necessary. Seven of the 17 committee members said they expect one more cut this year. President Donald Trump, who has pushed for more aggressive rate cuts and even a negative interest rate, responded by tweeting, “Jay Powell and the Federal Reserve FAIL again. No ‘guts,’ no sense, no vision!”

The uncertainty about next steps continued after the Fed’s two-day meeting. On Friday, Vice Chairman Richard Clarida said that the Fed would approach the issue of rate cuts “meeting by meeting,” adding, “we’re not on a preset course.” On the same day Eric Rosengren, President of the Federal Reserve Bank of Boston, said the economy was in solid shape given the headwinds, and further cuts “have the potential to amplify a downturn, should it occur.” Rosengren voted against the rate cut.

The Fed and repos

The Fed was also in the news last week for doing something it hadn’t done in almost a decade, intervening in the market to keep interest rates close to its target rate. The Fed did that by injecting billions through overnight repurchasing agreements or “repos,” and said it plans to add at least $75 billion a day in repos through Oct. 10.

Saudi Arabia and the price of oil

Last Monday, the price of oil jumped 14 percent — the biggest one-day spike since Iraq invaded Kuwait in 1990 — after drone attacks on Saudi Arabia’s oil facilities cut that nation’s production in half. Saudi Arabia is the world’s biggest oil exporter, accounting for 5 percent of daily global output. Over the course of the week, the price of oil fluctuated sharply. Initially it appeared that Saudi Arabia would be able to restore capacity by the end of this month. But a second report claimed the country would have to import oil in the near term to meet the needs of its customers. Brent crude finished up 6.7 percent, its best week since January, and U.S. crude rose 5.9 percent. Both Saudi Arabia and President Trump blamed Iran for engineering the drone strikes. Iran said it would respond to any attack with an “all-out war.” Yemeni rebels pledged a new round of attacks.

The trade talks

Investors were disappointed late last week when Chinese officials unexpectedly canceled a visit to farms in Montana and Nebraska. President Trump responded by saying China was a “threat to the world, in a sense,” and said the Chinese wanted to make a deal because of the economic pain the tariffs had inflicted. “I’m looking for a complete deal. I’m not looking for a partial deal,” he added. The next round of talks between the two countries is scheduled for October.

There was other news on the trade front as well, with the White House reportedly closing in on “mini” deals with Japan and India. In addition, in a case that has been litigated for 15 years, the World Trade Organization gave the United States the green light to assess billions in retaliatory tariffs against the European Union as a result of the EU’s having subsidized Airbus when it was competing with Boeing for contracts.

Brexit

Great Britain’s Prime Minister Boris Johnson met with EU leaders last week to try to rework the Brexit deal that’s scheduled to take effect on Oct. 31. The response of EU officials to his overtures was tepid at best. Xavier Bettel, Luxembourg’s Prime Minister said, “We need more than just words. We need a legally agreeable text to work on as soon as possible if we want to meet the October deadline.”

In other news, the Fed said manufacturing production increased 0.5 percent in August after declining 0.4 percent in July. Industrial production, which includes manufacturing, rose the same 0.6 percent from the month before and was up 0.4 percent year over year. Capacity utilization ticked up from 77.5 percent in July to 77.9 percent in August. In a sign that lower mortgage rates are beginning to boost sales, existing home sales rose 1.3 percent in August from July to an annual rate of 5.49 million. The National Association of Realtors reported home sales were up 2.6 percent from August of 2018. The median sales price rose for the 19th month in a row to $278,000, up 4.7 percent from a year earlier. Lower mortgage rates were also seen as the reason that the National Association of Home Builders/Wells Fargo index of confidence rose from 67 in August to 68 in September, its highest level this year. Housing starts were up 12.3 percent in July from August to 1.36 million, while building permits rose 7.7 percent in August to 1.41 million. And first-time jobless claims for the week ending Sept. 14 increased 2,000 to 208,000; the four-week moving average fell 750 to 212,250.

A look ahead

This week’s releases will include the latest on the S&P CoreLogic Case-Shiller home price index, new and pending home sales, personal spending and income, consumer sentiment, and the next estimate for second-quarter GDP, expected to remain unchanged at 2 percent.

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.