Market Monitor: August 2019 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
- Tumultuous month for markets: Investors’ caution due to the trade war and slowing global growth prompted a drop in stocks and a rally in government bonds in August. Volatility jumped, with the Standard & Poor’s 500 Index falling 2.5% or more in a day on three occasions during the month, the most in eight years. Despite the pullbacks, year-to-date returns remain solid and the S&P 500 finished the month just 3.3% off its all-time high. Taxable bonds are on pace for their first year of double-digit returns since 2002, as measured by the aggregate bond index.
- Trade war accelerates: New 15% U.S. tariffs on about $112 billion of clothing and other imports from China took effect at the beginning of September, with Beijing imposing retaliatory measures. Trade tensions have intensified since a hoped-for preliminary agreement fell apart in May, hardening further when President Trump announced the latest tariffs in an August 1st The two countries have struggled to resume formal talks.
- Brexit outcome unsettled as Parliament rebels against PM: Britain’s House of Commons dealt Prime Minister Boris Johnson a stinging defeat in a vote that reduces the odds of the country crashing out of the European Union next month without a deal. Lawmakers approved a proposal that, if also passed by the House of Lords, requires the government to seek a three-month extension to the October 31st Brexit deadline if it cannot agree with the EU by October 19th on new terms for separation that Parliament also approves. Johnson’s call for a general election next month failed to draw the required support from Parliament.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- Trade war developments continue to weigh on investors and economies, including those of Germany and the United Kingdom where GDP turned negative in the second quarter. Stocks retain their solid gains for the year to date because of central banks’ accommodative policies and the continued expectation that the United States and China will ultimately reach some kind of trade agreement.
- The U.S. economy remains sound, as evidenced by a larger-than-anticipated rise in the latest monthly reading of the Leading Economic Index. Consumer spending is healthy, unemployment is near a multi-decade low at 3.7%, and the labor market has extended its record expansion streak to 106 months. Weak spots are mostly the result of the trade war: Business confidence and the manufacturing sector, which shrank last month for the first time since September 2016.
- The yield on the 10-year U.S. Treasury note sank to 1.5%, down more than a percentage point from the start of the year. The yield on the 30-year Treasury fell to its lowest level ever in August, just under 2%.
- Longer-dated bonds are yielding less than shorter bonds, which historically signals a coming recession. We believe a recession is unlikely in the next 12 months, however, given the solid U.S. economy and an accommodative Fed, which according to CME’s FedWatch tool is virtually certain to lower interest rates again at its Sept. 17-18 meeting. Since 1978, on average a recession occurs around 20 months after inversion and the S&P 500 rises 22% from inversion to its peak prior to recession.
- REITs were the only higher-risk asset class to post a gain in August, benefiting from lower rates and investors’ quest for yield. Real estate was the top-performing S&P 500 sector in the third quarter entering September, trailing only technology for the year to date. U.S. REITs are the top asset class in 2019, with the benchmark up nearly 26%.
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.