Monthly Economic Update August 2019: Despite Unsettling Summer, Markets Have Held On To Healthy Gains
The summer of 2019 has been an unsettling time for investors. As the trade war between the U.S. and China escalated, the ongoing Brexit struggle frayed relations in Europe. Plunging global interest rates and the inversion of the U.S. yield curve for the first time since the financial crisis also unnerved investors, triggering stock market volatility. For the month of August, equity markets declined globally with the steepest losses in the emerging markets. Fixed income and other defensive assets such as precious metals were safe-havens, once again demonstrating the benefits of a diversified investment portfolio. Year to date, both the stock and bond markets have held on to healthy gains from earlier in 2019.
Equity market sectors that investors perceive to be more stable outperformed for the month. Defensive sectors such as consumer staples, utilities and real estate earned positive returns. Larger high-quality growth companies experienced modest losses. Areas of the market that are more exposed to a slowdown in economic growth underperformed. Energy and financial stocks suffered the largest losses, dragging down the value category which has a large weighting in these sectors. Emerging markets were hampered by their reliance on trade and manufacturing as well as sharp currency declines versus the U.S. dollar. Cyclical commodities such as copper also experienced sharp losses.
Fixed income results were positive for the month of August. High quality, longer maturity bonds outperformed as interest rates fell and credit spreads widened. U.S. Treasury yields are trading at the lowest levels seen in years. High yield bonds and loans with heightened credit risk have recently languished amid concerns over corporate leverage and liquidity as well as the stock market pullback. Strong investor demand for municipal bonds, which tend to outperform late in an economic cycle, has offset an increase in issuance from states and municipalities.
U.S. economic growth has been relatively stable, falling in the 2% to 3% range for several quarters. However, signs of a slowdown are intensifying. The Federal Reserve regional banks estimate that third quarter growth will fall in the 1.5% to 2.0% range. Although the services sector continues to expand, U.S. manufacturing activity has declined for the first time in three years. Investment spending by corporations and business confidence has weakened as the trade war continues to fester. U.S. consumers, the driving force behind economic growth, have also shown signs of declining confidence. The most recent jobs report was disappointing and annualized wage growth has declined since passing the 3% threshold a few months ago. Global manufacturing activity and trade has been slowing for several months. The Federal Reserve and the ECB are being closely watched by investors as they consider rate cuts and other stimulus measures.
Disclaimer: This commentary was written by Craig Amico, CFA®, CIPM®, Senior Investment Analyst, Noreen Johnston, CFA®, Director of Portfolio Management and Steven Melnick, CFA®, Senior Investment Analyst at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as speciﬁc advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and ﬁnancial planning services. Indices are unmanaged and cannot be invested into directly. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data; the Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market; the Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market; the MSCI EAFE Index (Europe, Australasia, Far East) is a free ﬂoat-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada; the MSCI Emerging Markets Index is a free ﬂoat-adjusted market capitalization index designed to measure the equity market performance of emerging markets; the Bloomberg Commodity Index measures the performance of an unleveraged, long-only investment in commodity futures that is broadly diversiﬁed and primarily liquidity weighted; the Dow Jones U.S. Real Estate Index measures the performance of the real estate sector of the U.S. equity market. It includes companies in the real estate holding and development industries and Real Estate Investment Trusts; the Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S.; the Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade ﬁxed-rate debt markets that excludes USD denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market.Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Consult your ﬁnancial professional before making any investment decision. Past performance is no guarantee of future results. Diversiﬁcation/asset allocation does not ensure a proﬁt or guarantee against a loss. 09132019-621