Market Monitor: August 2019 Mid-Month Update
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- Bond yields tumble amid rising global anxiety: Global yields sank with the 30-year falling to all-time lows as investors sought shelter in bonds, anticipating further deceleration of global growth and interest-rate cuts by central banks. The amount of global debt with negative yields ballooned to nearly $16 trillion. The benchmark U.S. 10-year Treasury yield fell as low as 1.57% – down from 2.01% at the end of July and less than half of what it was last November. The spread between the 2-year and 10-year yields inverted ever so slightly and briefly on Wednesday for the first time since 2007. An inversion has been historically a recession indicator within the next 18 to 24 months.
- Markets whipsawed in turbulent August: Market volatility spiked on pessimism over near-term trade deal prospects, slowing growth and rising global tensions. Several geopolitical or economic hotspots flared: Hong Kong, with clashes between police and protesters; Italy, where the ruling coalition splintered; Germany, with a contracting economy; Argentina, where the stock market fell 40% after the pro-business ruling party was routed in the presidential primary election; and Brexit uncertainty. The S&P 500 fell as much as 6.1% from its July 26th record high and ended down 3.1% for the month through today’s close. International developed stocks fell 5.3% while emerging-market stocks slid 7.1%.
- Trade fight escalates: The U.S.-China trade feud intensified as Beijing let its currency depreciate to an 11-year low against the dollar in response to planned 10% tariffs on $300 billion in Chinese imports. The U.S. Treasury accused China of currency manipulation, unfairly boosting its exports at the United States’ expense. Washington later removed some items from the list of new tariffs and delayed some consumer goods until December 15th as sporadic trade discussions continued.
Chart of Interest
Reelection Risk: The poor track record of presidents seeking reelection during recessionary periods is likely to motivate President Trump to make a trade deal with China.
Sources: The Roaring 2020s, Strategas Research
- Trade war uncertainty is high and remains the greatest risk to the world economy. Tariffs have contributed to the global economic slowdown, and business confidence and spending will likely suffer the longer the U.S.-China conflict lasts. We continue to believe, however, that the strong political and economic incentives for a deal are high enough to motivate President Trump to reach an agreement before next year’s presidential election, as Tuesday’s announced delay in new tariffs demonstrated. China continues to engage in trade talks and backed off its initially aggressive yuan rate, all signs that it is still open to negotiations.
- The inversion of the 2-year and 10-year Treasury curve this week has the bond markets signaling that tight monetary policy is stunting growth and reducing inflation, which we believe will result in the Fed continuing to cut rates at their next meeting in September and beyond.
- A yield curve inversion is not a good market timing indicator as history suggests a recession and market downturn can still be a long way off. Over the last five recessions since 1978, the S&P 500 peaked approximately 16 months after the inversion, with a range between 2.5 and 22 months and a recession occurred approximately 20 months after inversion, with a range between 9.5 months and 33 months. Finally, The S&P 500 was up 22% from inversion to its peak prior to recession, with a low of 8.7% and a high of 37%.
- Quantitative Easing in the U.S. has most likely altered the reliability of yield curve inversions to predict recessions. Indeed, negative yields in Europe and Japan have forced yield-starved investors to pile into U.S. Treasury bonds – artificially pushing down longer rates. This economic cycle is somewhat unusual relative to previous yield curve inversions in that the Fed is already in the process of lowering rates. In previous cycles, the Fed was hiking rates even after the yield curve was inverted and thus may have inadvertently tipped the economy into a recession.
- We utilize a mosaic approach by monitoring several different indicators. Other important economic indicators beyond the yield curve remain in good shape. The consumer is healthy as evidenced by a jump in retail sales in the month of July at 0.7%, while initial jobless claims on Thursday remained low at 220,000.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice