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Volatility Returns to the Market For the week of October 7, 2019

Key Market Data

09/27/2019 10/04/2019 One Week Change YTD One Year
S&P 500 Index 2,961.79 2,952.01 -0.33% +19.59% +3.83%
MSCI EAFE Index 1,895.72 1,854.43 -2.18% +11.32% +0.98%
Barclays Capital U.S. Aggregate Bond Index 2,219.97 2,238.05 +0.81% +9.35% +12.00%
10-year Treasury Note Rate 1.683% 1.530% -15.3 basis points -115.5 basis points -165.8 basis points

It was a volatile week for stocks, and little wonder. Already edgy because of the ongoing trade war with China and the unfolding impeachment drama in Washington, investors had to process mixed news about manufacturing, services, and jobs — and decide what the Federal Reserve would or wouldn’t do about it. The result was a week of sharp ups and downs. Despite a rebound on Friday, both the Dow and S&P 500 were down for the third week in a row. The Nasdaq eked out a gain. Not surprisingly, some investors sought out the safety of bonds, which pushed the yield on the 10-year down, it finished the week at 1.53 percent.

The rollercoaster ride for stocks began on Tuesday after the Institute for Supply Management said that its manufacturing index came in at 47.8 in September, the weakest showing since 2009. The latest report followed a reading of 49.1 in August, the first time in three years that the index had fallen below 50, which indicates the sector is contracting. The report came on the same day that the World Trade Organization said it’s now forecasting global trade to grow at a rate of 1.2 percent this year, which would be the slowest pace in a decade. In addition, some analysts believe GDP in the United States will fall below 2 percent in 2020. As a result of that news, both the Dow and S&P 500 lost the ground they’d gained in the third quarter.

Two days later, the ISM released its nonmanufacturing index. Although the reading for September was positive at 52.6, it was down from August’s 56.4. And while September’s number was the 116th positive reading for the ISM nonmanufacturing index, it was also the lowest reading in three years. Services account for more than two-thirds of the economy, and the report sent stocks down even further on Friday than on Tuesday, with the Dow and S&P 500 falling into negative territory for the previous 12 months.

The Fed

Investor’s turned slightly less melancholy on Friday after the Labor Department announced that only 136,000 jobs were added in September, below the consensus forecast. That news led some to believe there’s an increased chance that the Fed will lower its benchmark rate again this year, maybe even twice. In fact, according to the CME Group, the chances for another cut this year went from 40 percent last Monday to 78 percent on Friday. In a speech on Friday, the Fed’s Chairman, Jerome Powell, said the U.S. economy was in a “good place” despite the recent headwinds, but also indicated the Fed was ready to act if need be, saying, “Our job is to keep it there as long as possible.”

The jobless rate

While only 136,000 jobs were added in September, the unemployment rate fell to 3.5 percent from 3.7 percent in August, the lowest it has been since 1969. Despite that, year-over-year wage growth declined to 2.9 percent compared to 3.2 percent in August, and fewer manufacturing jobs were added for the second month straight. On the plus side, 45,000 jobs were added to the totals for July and August, and the total number of Americans employed rose to 61 percent, the best percentage since late 2008.

The trade wars

Trade talks with China are scheduled to begin again this week in Washington, but there was some action on the trade front last week. As a result of its 15-year-old case against the European Union for having subsidized Airbus over Boeing, the WTO said that the United States could hit the EU with $7.5 billion in additional tariffs a year until a settlement is reached. The White House promptly announced that it would impose new tariffs as of Oct. 18, targeting a range of products including aircraft, cheese, whisky, and French wine. The only drawback to the plan is that next year the WTO is expected to rule that the United States subsidized Boeing as well, giving the EU a chance to retaliate with higher tariffs of its own. However, the EU indicated that it would not respond in the short term, perhaps because it’s waiting to see whether the White House will impose new tariffs on European cars and car parts. President Trump said he would make that decision by Nov. 13.

Meanwhile, the government reported that the trade deficit grew to $54.9 billion in August, up 1.6 percent from July. On the plus side, this shows that American consumers are spending. However, for the first eight months of 2019, the deficit is up 7 percent from 2018 to $428.7 billion, which suggests that President Trump’s campaign to equal the playing field with tariffs is still a work in progress.

Brexit

With the clock ticking ever more loudly — the date for the Brexit is Oct. 31 — Prime Minister Boris Johnson submitted a new plan to the EU last week. Meanwhile, the British government affirmed, per a recent bill passed by Parliament, that it would ask for a three-month extension from the EU if no agreement was reached by the end of this month. Despite that, Johnson has continued to say that leaving the EU without a plan was still an option. His new plan, which he dubbed “reasonable and constructive,” was met with a tepid response by the EU.

In other news, construction spending rose 0.1 percent in August from July. Factory orders were down 0.1 percent in August from the month before. And first-time jobless claims for the week ending Sept. 28 increased 4,000 to 219,000; the four-week moving average was unchanged from the previous week’s revised total of 212,500.

A look ahead

This week’s releases will include the latest on consumer credit, small business optimism, the producer and consumer price indexes, job openings, wholesale trade, and the University of Michigan’s consumer sentiment reading, as well as the minutes of the Fed’s last meeting in September at which it cut it rate for the second time this year.

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.