Market Monitor: August – Altair’s Semi-Monthly Market 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
- NAFTA replacement hits snags after U.S.-Mexico accord: The three-way North American Free Trade Agreement was renegotiated with a preliminary agreement between the United States and Mexico but no agreement so far with Canada. A key sticking point in talks between the U.S. and Canada is how disputes would be resolved under the proposed pact.
- Emerging market difficulties spread: Argentina and Turkey both experienced deepening fiscal woes that further pressured their currencies amid heavy debt and inflation, while Brazil and South Africa also have struggled to cope with economic problems. The U.S. dollar’s rise this year has compounded the difficulties for emerging markets. The iShares MSCI Emerging Markets Index sank 3.8 percent in August and was down 7.8 percent for 2018.
- Longest U.S. bull market leaves some asset classes behind: The bull market in U.S. stocks reached record length at nearly nine and a half years since the 2009 bottom. After months of mostly trading sideways, both the Standard & Poor’s 500 and the Nasdaq reached new highs in late August. While a few asset classes have done very well in 2018, a number of categories have disappointed. Besides international markets, bonds have had a lackluster year, commodities have delivered negative returns and value stocks have far underperformed their growth counterparts.
Selected Market Returns
Sources: Altair Advisers, Investing.com
- The agreement with Mexico on North American trade reduces some of the risk for financial markets. A deal with Canada may shortly follow to complete a new iteration of NAFTA. However, we do not believe a new NAFTA deal will lead to a resolution with China any time soon. Neither Beijing nor President Trump is likely to feel pressured to compromise in the next few months ahead of the midterm elections. We still believe this ultimately will be resolved without becoming an extended trade war.
- Emerging markets are experiencing ongoing turmoil and we remain cautious even as valuations become more attractive. The countries under the greatest pressure – Argentina, Turkey, Brazil and South Africa – comprise a relatively small weighting of the emerging markets equity category. China, the largest EM country, continues to be under pressure from the trade war with the U.S but we believe a deal will eventually be reached.
- Early fall tends to be volatile in the markets but that has little influence on how the year ends. Corporate earnings remain strong and third-quarter GDP growth is estimated to be over 4 percent; we view a near-term recession as unlikely.
- Smaller companies’ stocks have benefited from accelerated consumer spending and largely escaped the trade tensions that have increased volatility in the larger cap names. While U.S. small caps have been 2018’s best-performing asset class so far, we believe they should remain at full weight in portfolios as they continue to be attractive at this time in the current market cycle.
- The yield curve between the 2- and 10-year Treasury bond rates has flattened further to 0.24 percent but we do not view this as worrisome in the context of a strong economy. We would be more concerned by an inversion – when the 2-year yield surpasses that of the 10-year – since that historically has been followed by a recession. Federal Reserve Chairman Jerome Powell made clear in a speech at Jackson Hole, Wyoming, that the Fed will continue to raise rates only gradually and does not wish to halt the economy’s momentum.
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.