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Investors Focus on Impeachment Proceedings For the week of September 30, 2019

Key Market Data

09/20/2019 09/27/2019 One Week Change YTD One Year
S&P 500 Index 2,992.07 2,961.79 -1.01% +19.94% +3.72%
MSCI EAFE Index 1,912.66 1,895.72 -0.89% +13.78% -1.04%
Barclays Capital U.S. Aggregate Bond Index 2,211.70 2,219.97 +0.37% +8.47% +10.27%
10-year Treasury Note Rate 1.723% 1.683% -4.0 basis points -100.2 basis points -137.0 basis points

As if a trade war wasn’t enough, now investors have a new drama: impeachment proceedings against President Trump. The charges stem from Trump allegedly encouraging Ukraine to investigate Hunter Biden, the son of Joe Biden, his potential rival in next year’s presidential race. Even if Trump is found guilty in the House, controlled by Democrats, it’s highly unlikely that a GOP-controlled Senate would remove him from office.

Nonetheless, the impeachment proceedings will at the very least be a distraction for markets, and at worst a way to further divide an already partisan Congress and nation, perhaps impacting Trump’s legislative and economic agenda. Last week the prospect of impeachment proceedings was enough to send all three major indexes down, not long after they’d inched back into the range of their record highs. The yield on the 10-year Treasury also fell for the second week straight, dipping to 1.673 percent.

The trade war

With U.S./China trade negotiations set to recommence early next month, the White House sent mixed signals last week about what’s next. Speaking at the United Nations on Tuesday, President Trump emphasized nationalism and patriotism over globalism, criticized China and defended the trade war. On Wednesday, however, Trump told reporters at the U.N. that the deal with China “could happen sooner than you think.” On Friday, stocks fell after Bloomberg News reported that the White House was looking into curtailing the ability of Americans to invest in China, including preventing American companies from listing shares on China’s stock exchanges.

The U.S. did sign off on one trade deal last week, which will open up Japan to American farm goods, including beef, wine, and wheat, which have long been blocked by the Japanese. The president described the deal as “a huge victory for America’s farmers, ranchers, and growers” who have been “targeted by China.” Though it wasn’t stated in the agreement, the assumption is that the U.S. will not put tariffs in place on Japanese cars as Trump had threatened. Japan’s Prime Minister, Shinzo Abe, who was criticized at home because Japan seemed to be on the short end of the deal, said Trump had told him tariffs on cars will not be imposed.

Incoming European Central Bank President Christine Lagarde said last week that she believes the trade wars are “a big, dark cloud,” that will reduce global growth by 0.8 percent in 2020. She called that a “massive number.”

The economy

New evidence last week indicated that America’s consumers and businesses were increasingly concerned about, and impacted by, the ongoing trade war. Economic growth is slowing, business investment is declining, and the amount consumers are spending is also slowing.

Here are the actual numbers: The government said that the economy expanded at a rate of 2 percent in the second quarter, unchanged from the previous estimate, but down from 3.1 percent in the first quarter. Consumer spending was down to 4.6 percent from the previous estimate of 4.7 percent, however business investment declined 1 percent, the worst showing since the last quarter of 2015. Meanwhile, incomes were up 0.4 percent in August from July, but personal consumption expenditures rose only 0.1 percent, down from the 0.5 percent average for the first seven months of the year. The PCE price index was unchanged month over month and 1.4 percent for the year. The core PCE index, excluding food and energy, advanced 0.1 percent for the month and 1.8 percent for the year.

Given the latest figures, some estimates for third-quarter growth have now fallen below 2 percent. And the Conference Board’s consumer confidence index fell to 125.1 in September from August’s revised 134.2 with the Conference Board saying, “the escalation in trade and tariff tensions in late August appears to have rattled consumers.” Finally, though the University of Michigan’s consumer sentiment index was 93.2 in September compared to 89.8 in August, a near record number of respondents, about one-third, cited trade as a concern.

Avoiding a shutdown, for now

The government does not have a budget for the new fiscal year that begins tomorrow, but Congress has passed a short-term spending bill to keep the government running through Nov. 21 and President Trump is expected to sign it. After the vote Chuck Schumer (D, NY), the Senate Minority Leader, said, “This is the easy part. The hard part is getting a bipartisan appropriations process back on track.”

Brexit

Prime Minister Boris Johnson’s Brexit plans took another hit last week when Britain’s high court unanimously ruled that his suspension of Parliament had been illegal. This comes after Parliament voted against his leaving the European Union without a plan come Oct. 31 and blocked his efforts to hold new elections to strengthen his hand. Parliament promptly reconvened and Johnson and his opponents gave each other an earful. Britain’s pride endured another blow when the venerable travel company Thomas Cook, founded in 1841, unexpectedly went bankrupt last week, leaving 600,000 people stranded on overseas trips.

In other news, the S&P CoreLogic Case-Shiller home price index was up 3.2 percent in July from a year earlier. New home sales rose 7.1 percent in August from the month before, and the National Association of Realtors said that pending home sales increased 1.6 percent in August from July and were up 2.5 percent from a year earlier. Orders for durable goods declined 0.2 percent in August from July and were down 4.2 percent from August of 2018. Orders for non-defense capital goods excluding aircraft, fell 0.2 percent. Retail inventories were unchanged in August from July. And first-time jobless claims for the week ending Sept. 21 climbed 3,000 to 213,000; the four-week moving average dipped 750 to 212,000.

A look ahead

This week’s releases will include updates on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, vehicle sales, consumer comfort, factory orders, the trade balance, and the unemployment rate for September, expected to remain unchanged at 3.7 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.