Conway’s QuickTake: Week of October 14, 2019


Here’s what happened last week:

U.S. Equities
The S&P 500 Index increased 0.7% over the week, bolstered by signs of a potential trade deal between the U.S. and China. “Phase one” of the deal caused export sensitive sectors like materials (+1.9%), industrials (+1.6%) and information technology (+1.3%) to perform well. Renewed economic optimism and a rise in yields negatively impacted more defensive, rate-sensitive sectors including utilities (-1.4%), consumer staples (-0.8%), and real estate (-0.6%). The Russell 1000 Growth Index (+0.8%) outpaced the Russell 1000 Value Index (+0.5%). Small- and mid-caps were roughly in-line with large-cap equities.

Fears of slowing growth were quickly overshadowed by renewed optimism surrounding a trade deal with China. As has been the case, trade negotiation developments shifted throughout the week between hopes of progress and fears of new demands/tariffs. As recently as last Tuesday, a report indicated that the U.S. was seeking to blacklist 28 Chinese firms. This quickly triggered a Chinese statement about potential retaliation. Discussions (and markets) became incrementally more positive later in the week when Bloomberg reported that the U.S. was open to a partial deal that would delay tariffs. Deemed “Phase one” by President Trump, the first steps of a negotiation would suspend impending 10/15 tariffs in exchange for increased Chinese purchases of domestic agricultural products, certain intellectual property protections, and pledges around Chinese currency management. Domestic economic data was also supportive as consumer sentiment and jobless claims both came in slightly ahead of expectations.

Source: iStock

International Equities
Most international equity markets strongly outpaced U.S. peers. The MSCI EAFE Index rose 2.3% last week, while the MSCI EM Index had a healthy gain of 1.5%. Brexit negotiations drove gains in European stocks as the MSCI Europe Index rose nearly 3%.

Positive U.S./China trade developments paired with improved prospects of a soft Brexit drove positive sentiment outside of the U.S. The British pound rallied about 3% relative to the USD on news that the E.U. and the U.K. have agreed to “intensive negotiations” in the coming days. This contributed to improved odds of an amicable break between the U.K. and the E.U. An economic weak point amongst the European optimism was from Germany as signs continue to show weakening economic conditions in Europe’s largest economy. Japan’s Cabinet Office also reported that business conditions were ‘worsening’ and that the economy might be slipping back into a recession.

Credit Markets
Bond yields were mostly higher at the close of the week. Steps towards a potential trade deal and improved economic data pushed the U.S. treasury 10-year yield sharply up more than 20 basis points, ending the week at roughly 1.75%. This compares to the sub-1.5% levels touched a little over a month ago. The rise in rates contributed to negative returns in most fixed income asset classes. One exception was high yield credit as improved economic sentiment pushed spreads tighter, offsetting interest rate exposure. Municipals were slightly negative but outperformed treasuries and most corporate credit asset classes, supported by strong demand.

Looking ahead…
We will be looking closely at GDP and industrial production figures coming out of China on Thursday. These figures will give greater insight into the ongoing impact of the trade war on the Chinese economy, while giving context to the “phase one” agreement made last week.

Tuesday, October 15th, 2019
• Great Britain: Average Earnings Index +Bonus (Aug), Claimant Count Change (Sep) – the Claimant count is a measure of unemployed in the U.K. during the reported month
• German ZEW Economic Sentiment (Oct)
Wednesday, October 16th, 2019:
• GB: September CPI
• Eurozone: September CPI
• US: September Core Retail Sales, Retail Sales, Crude Oil Inventories
Thursday, October 17th, 2019:
• GB: Retail Sales
• US: Building Permits, Philadelphia Fed Manufacturing Index
• China: GDP (Q3), Industrial Production

Resource of the Week
There were few asset classes that were close to flat in 2008 but farmland was one of them. This episode of Capital Allocators sits down with Jay Girotto, president of Farmland Opportunity, a $400 million investment manager focused on buying and managing high-quality farmland in the U.S. It’s a relatively quick and insightful look into one of the more obscure assets classes that can be leveraged in portfolios.

Sources: Investing.com, Bloomberg, The WSJ, T. Rowe Price Global Markets Weekly Update, J.P. Morgan, Barron’s