August 16, 2019 – This was another exciting week in the stock market. Sadly, the final result wasn’t a positive number, but considering how things looked at various points this week, it almost feels like we got off easy.
Trade and interest rates remain the drivers of the market and it seems like it is going to be that way for some time. Monday saw a decline as markets continued to react to President Trump’s Friday announcement that trade talks with China in September may not happen. Tuesday’s rally was sparked largely by the announcement that tariffs on more than half of the $300 billion in Chinese imports set to be hit with new duties on Sept. 1 would be postponed to Dec. 1. This includes a lot of consumer goods such as toys, clothing and electronics. Wednesday, stocks noticed the action over in the bond market, where the spread between 2-year yields and 10-year yields briefly inverted, which is frequently a recession indicator. Thursday got a boost from Walmart earnings and a better-than-expected retail sales number for July. Friday saw another up day as the trade war didn’t escalate further and there were reports that Germany was prepared to run deficits if the country falls into a recession.
There’s a lot going on in the preceding paragraph, but really only two big themes: the trade war and interest rates.
The trade war continues, at best, to cause a lot of anxiety, but it is hard to image taxes ranging from 10% to 25% aren’t actually reducing the amount of goods being exchanged. The Trump Administration’s statements about the reasons for the delay acknowledged that it is in fact U.S. consumers who pay for tariffs, which represents a change from their rhetoric up until now. It does now seem like September talks are back on, but the two sides seem to remain pretty far apart, so a deal next month, or even by the end of the year still seems unlikely.
The bond market certainly doesn’t seem to be expecting a deal any time soon. There are now trillions of dollars worth of government debt that trade with negative yields. U.S. Treasuries have yet to cross that barrier, but rates across the yield curve fell this week. The yield on 30-year notes hit a record low before finishing out the week at about 2%.
The drop in rates, and the fact that longer-term rates have fallen further than short-term rates are a sign that people with money to invest are more worried about safety than return. Buying a 30-year bond at an interest rate below 2% suggests that you believe you may not be able to make, on average, more than that through other investments during that time. That’s not a particularly rosy outlook behind the investment of trillions of dollars in low-yielding U.S. Treasuries or negative-yielding debt abroad.
Economic health is, in large part, about confidence. Business leaders who are confident in the outlook for their companies, invest in their businesses. Consumers who are confident in their financial situation spend more freely. Those spending decisions feed back into the economy in a virtuous cycle.
The same thing can happen to the downside though. Money spent on safe investments (Treasuries are considered basically risk free) isn’t being spent on new equipment, salaries or even at restaurants.
We’ve frequently pointed out in this space that underlying economic data is relatively strong, particularly when it comes to the consumer. That was reinforced this week by both data about retail sales in July and Walmart’s earnings report. Today’s consumer confidence number though came in both below expectations and below last month’s number. This may be a blip, but if consumers start to put the brakes on their spending, things could start to turn south.
On the week, the S&P 500 lost -1.03%, the NASDAQ lost -0.79%, and the Dow Jones Industrial Average lost -1.53%.