Conway’s QuickTake: Week of August 26, 2019
Continued trade war escalation overshadowed positive retail sales data and caused domestic markets to finish negative for the week with the S&P 500 down 1.4%. Only two sectors were positive last week, consumer discretionary (+0.1%) and utilities (+0.2%). Strong earnings from Target, Lowes and Home Depot fueled gains in the consumer discretionary sector. Lower bond yields helped contribute to positive performance in the utility sector, which typically pays high dividends relative to other sectors. Small-caps underperformed as the Russell 2000 ended the week down 2.3%
In economic news, trade tensions escalated again last week when China announced tariffs on $75 billion of U.S. goods, including 25% tariffs on autos. President Trump strongly recommended that U.S. companies look for alternatives to Chinese manufacturing, further weakening markets last week. In a reversal this morning, President Trump stated he would like to restart talks with China, helping to support markets. Comments from the Federal Reserve also helped bolster markets as Jerome Powell reiterated his commitment to supporting the expansion with all tools at the Fed’s disposal. Investors should continue to expect volatility as mixed global economic data continues to impact markets.
International Developed Equities
Developed international equities were positive for the week, with the MSCI EAFE Index closing 0.9% higher. Most European equity indexes rose mildly in response to dovish ECB remarks, but remain susceptible to increased trade war tension. In addition, Germany’s economy continues to falter with recent manufacturing data pointing to a possible recession on the horizon if conditions do not improve. Japanese stocks rose more than 1.0%, although its equity markets remained well behind the U.S. so far this year with the MSCI Japan having risen only 2.9% vs. the S&P 500’s 15.1%.
International Emerging Equities
Emerging markets (MSCI EM Index rose 0.4%) and Chinese equities (MSCI China Index rose 1.1%) were also positive for the week backed by strong corporate earnings. Notably, Chinese markets closed last week ahead of the escalation in the trade war on Friday, so the impact from the escalation was not priced-in before the end of the week. Chinese markets also benefitted from recent accommodative interest rate reform from the People’s Bank of China and a continued weakening of the yuan, which has helped offset tariffs imposed by the U.S.
Rates fell over the week and the yield curve inverted again with 2-year yields rising above 10-year yields. Many investors view this as a strong recessionary signal. As volatility remains pervasive across markets, fed funds futures are pricing in nearly a 90% chance for at least two rate cuts before the end of the year in the U.S. Most investment grade bonds performed well and demand for high yield remained strong, despite tight credit spreads.
The municipal market had a large issuance of $8 billion in the form of Texas tax and revenue anticipation notes. The deal was over three times oversubscribed, a continued indication of a high level of demand within the municipal bond market. According to J.P. Morgan, year-to-date municipal fund inflows have exceeded $61 billion as investors look to shield income from taxation. This is particularly prevalent in high tax states and New Jersey bonds are up more than 10% over the prior year, the best performance of any state.
This upcoming week is an important one with key economic data coming out of Germany, the U.S. and China. Markets will closely watch U.S. GDP data on Thursday and Chinese manufacturing PMI on Friday for insight into how the trade war is impacting the world’s two largest economies.
- Monday (8/26): German Ifo Business Climate Index (Aug), U.S. Core Durable Goods Orders (MoM) (July)
- Tuesday (8/27): German GDP (QoQ) (Q2), U.S. Consumer Confidence (Aug)
- Wednesday (8/28): U.S. Crude Oil Inventories
- Thursday (8/29): German Unemployment Change (Aug), U.S. GDP (QoQ) (Q2), U.S. Pending Home Sales
- Friday (8/30): Eurozone CPI (YoY) (Aug), Chinese Manufacturing PMI (Aug)
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Sources: Investing.com, Bloomberg, The WSJ, T. Rowe Price Global Markets Weekly Update, A|B This Week in Muniland