Economic Data Releases Caused Markets to Whipsaw Last Week
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 10/04/19. Rates and Economic Calendar Data from Bloomberg as of 10/04/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets finished lower for the third consecutive week. In the U.S., the S&P 500 Index fell to a level of 2952, representing a loss of 0.30%, while the Russell Midcap Index retreated 0.63%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, gave up the most ground of the three market capitalizations with a drop of 1.28% for the week. The lone bright spot was the tech-heavy NASDAQ Composite Index which was up 0.57%. Interestingly, there were six sectors of the S&P 500 that finished the week positive while five finished in the red. However, gains in technology and healthcare were dragged down by poor performance from energy, material, industrial, and financial sectors. On the international equities front, developed and emerging markets returned -2.16% and -0.46% respectively. In fixed income, 10 year U.S. Treasury prices strengthened sending the yield down to a level of 1.52%
Stocks were able to end the third quarter on a positive note, however, as the tone changed mid-week. On Tuesday, the Institute of Supply Management (ISM) manufacturing PMI release showed activity falling deeper into contractionary territory (i.e. below 50) as well as a lower than expected increase in construction spending. Putting this into perspective, it is important to appreciate that manufacturing currently only accounts for approximately 12% of gross domestic product (GDP) in the U.S. while the all-important consumer continues to account for 70% of economic growth. Regardless, the manufacturing news certainly disappointed investors and bore a resemblance to the weakness seen in Europe, causing further concerns about economic growth. The negative attitude would not last too long as major averages rallied on Friday on data showing that non-farm payrolls increased by 136,000 in September and that the unemployment rate dropped to a 50-year low of 3.5%. Further helping the bounce-back was the “bad news is good news” belief relating to the opinion of some that the weak data from earlier in the week supports the need for more intervention from the Federal Reserve in the form of additional rate cuts. It’s worth mentioning that we feel further rate cuts aren’t warranted at this time as the Federal Reserve has already seemed to achieve its dual mandate of promoting full employment and stable prices.
This week we turn to the highly anticipated talks between the U.S. and China on trade. In addition, third quarter earnings season is revving up and it will be interesting to see how slowing global growth, lower oil prices, and a strong dollar weigh on earnings. Currently, analyst consensus is calling for negative year-over-year earnings growth and positive year-over-year revenue growth. However, companies as a whole have surprised to the upside during the first two quarters of the year so we’ll see what this quarter holds. It is our contention that continued gains in quarterly revenues, recognizing that year-over-year gains in earnings over the meteoric rise in earnings in 2018, thanks in large part to reduced corporate tax rates, may not be possible or realistic, would help validate the continued strength of the U.S consumer.
With one quarter remaining in 2019 and volatility ever-present, it becomes increasingly important for investors to stay disciplined and focused on their longer-term goals. We encourage investors to work with experienced financial professionals to help manage their portfolio through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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