Understanding the Divergence between Consumer and Business Confidence
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 09/06/19. Rates and Economic Calendar Data from Bloomberg as of 09/06/19. 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 got off to a strong start in September. In the U.S., the S&P 500 Index advanced to a level of 2979, representing a gain of 1.83%, while the Russell Midcap Index increased 1.74% last week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, lagged it’s larger counterparts, however, still managed to gain a healthy 0.71%. On the international equities front, developed and emerging markets impressed moving higher 2.23% and 2.44% respectively. Finally, the 10-year U.S. Treasury yield closed out the week at 1.55%, slightly higher than the previous week’s close.
Following a sluggish start to the week, stocks quickly moved higher on optimistic news from around the globe. In particular, the U.S. and China agreed to in-person trade talks next month, suggesting there is progress to be made and providing some hope (again) to investors. In addition, we experienced a bit of relief in Hong Kong following months of protests as well as mounting optimism that Brexit could be further delayed, much to the chagrin of U.K. Prime Minister Boris Johnson.
In this week’s update, we thought it might be helpful to focus on the divergence between consumer and business confidence.
Source: J.P. Morgan Asset Management
The chart above illustrates an interesting pattern moving through 2018 and into 2019 where consumer confidence has been rising while CEO confidence has been falling. We contend that the economy and bull market rest on fundamentals that currently favor continued growth. This is due in large part to the relative strength of the U.S. consumer, who accounts for approximately 70% of gross domestic product (GDP) in the United States. Low unemployment, coupled with wage growth that has exceeded inflation, has helped support overall confidence and bolstered spending habits. We expect healthy levels of consumer spending to continue through the end of the year, particularly during the all-important holiday shopping season.
On the other hand, a slowdown in global growth, manufacturing indexes dipping into contractionary territory, and trade uncertainty are all red flags for companies, as evidenced by the continued decline in CEO confidence over this time-frame. Although earnings are growing and margins are healthy, businesses tend to be more forward-looking than consumers and future growth and pressures on profitability can be major concerns.
As mentioned, the consumer makes up the largest portion of GDP and while we still anticipate economic and stock market growth through 2019, it is important to realize that all of these factors are interconnected and may positively or negatively impact each other and, in turn, capital markets. With that said, we encourage investors to stay disciplined and work with an experienced financial professional to help manage their portfolios 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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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
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