August 30, 2019 – Stocks rose this week, more than recouping last week’s losses. Major indices are still a bit below their July highs, but some individual stocks are at all-time highs after earnings.
The S&P 500 currently sits near where it peaked in October of last year and in May this year. We’ll discuss the technical situation a bit more below, but as we’ve noted several times recently, the news takes precedence over the technicals.
One possible convergence of technical analysis and news, or at least a pattern we’ve noticed, is that President Trump tends to be more willing to escalate the trade war when the stock market is at new highs. This could be a coincidence, but it could also mean that we’re less likely to see more tariff increases announced until the major indices get above those late-July levels.
Potentially confirming this theory is the news from earlier this week. President Trump announced that China had called to make a trade deal. That announcement was later confirmed by members of the administration to be inaccurate and designed to boost the stock market. We’ve seen this pattern a number of times. Escalation of the trade war sinks markets, and then some vague, difficult to verify statements about phone calls or “productive” talks helps to stop the slide.
In actual trade-war news, China did pass on retaliating for the latest round of tariff hikes by the U.S. and face-to-face talks at some level are still expected next month. At this point, virtually no one expects a deal anytime soon, which likely means that tariff increases scheduled for Sept. 1 and Dec. 15 seem pretty likely to take effect.
That said, the lack of further escalation helped calm the market. The bond market also took a breather this week with yields stopping their recent slide. The spread between 2-year Treasury yields and 10-year yields remained inverted for much of the week. This has presaged recent recessions, but there have at times been gaps of up to 18 months between the inversion and the recession and in may cases stocks have set fresh highers after the inversion, so that, by itself, should not be a signal to investors to head for the hills.
Economic data release this week may have shown some negative effects from tariffs as the measure of inflation include in GDP calculations showed an increase in the second quarter. That increase obviously doesn’t include new tariffs set to take effect this weekend. The new round of import duties hits a lot more consumer-facing products than before and so is much more likely to show up directly in the prices paid by consumers.
This trend is worth keeping an eye on, as the Federal Reserve is trying very hard to keep rates low so as not to harm the economy, while also being mindful of its mandate to keep inflation in check.
Another worrying trend shows up in the University of Michigan Consumer Confidence report released today. Consumer sentiment fell to 89.9 from a July reading of 98.4. Richard Curtin, the economist behind the survey, said in his notes released with the data that President Trump’s frequent threats and reverals “may have some merit in negotiations with China” but also, ” increase uncertainty and diminish consumer spending at home”.
This is where the both the policies of the trade war, and the way they have been communicated to the public, start to hit home. Prices are rising as a result of tariffs, at the same time that consumers are becoming worried about spending money, and so are likely to spend less. Practically, this means that businesses selling tariffed goods will have a harder time raising prices and will this either before forced to accept lower sales volumes, or less profit per sale.
Tariffs can be lowered or eliminated pretty quickly, but sentiment can’t be changed with a tweet. Particularly when, as we saw earlier this week, consumers and the market have been mislead about the state of things before.
We would expect the news cycle next week to be dominated mostly by coverage of Hurricane Dorian, which is expected to hit Florida over the weekend. We’ll get monthly unemployment numbers on Friday, which will again start the discussion about what the Federal Reserve will do with interest rates when it meets in September.
On the week, the S&P 500 gained 2.79%, the NASDAQ gained 2.72%, and the Dow Jones Industrial Average gained 3.02%.