August 9, 2019 – Stocks went on quite a ride this week. It started with a continuation of last week’s trade-war inspired selling, and ended with a rally prompted by, we suppose, a lack of new headlines about the trade war.
The new wrinkle this week was largely about the exchange rate of dollars to the yuan after it broke the $7 barrier in Monday evening’s price setting. The U.S. responded by labeling China a currency manipulator. It should be noted though that the currency manipulator is both largely symbolic and also inaccurate under the Treasury Department’s own rules. China, for what it is worth, resumed controlling the price after Monday’s move and the yuan remained pretty stable for the rest of the week.
President Trump said Friday afternoon that trade talks currently scheduled for September may not happen, which does nothing to dissuade traders and analysts who are increasingly coming to believe that a deal isn’t going to happen any time soon.
To be clear, the market worry about trade is about the negative effect on global economic growth caused by moving to a more restrictive environment. We’ve discussed in several of our recent members-only workshops that the stock market and the bond market have very different opinions on the forward path for the economy.
This chart comparing the S&P 500 (red) to the yield on 10-year Treasuries shows that while stocks have set new highs twice since last fall, bond yields have been in a steady decline. This means investors are willing to take much lower returns in exchange for safety than they were 10 months ago. Meanwhile there is a huge, and growing, amount of debt around the globe that has a negative yield. This means investors are willing to lock in small losses because they’re afraid of bigger losses elsewhere.
That much money sitting in safe-haven assets means government borrowing actually has a positive return in some countries, but also highlights how much uncertainty there is about the global economy.
The S&P 500 is currently on pace for a second-straight quarter of earnings declines according to data compiled by FactSet. That doesn’t include the effects from the latest round of tariffs on Chinese imports. This group of goods is much more consumer facing goods previously hit with import duties, so it will be interesting to see what happens in the economy, particularly when consumer spending was one of the main drivers of growth in the last quarter.
On the week, the S&P 500 lost -0.46%, the NASDAQ lost -0.56%, and the Dow Jones Industrial Average lost -0.75%.
The S&P 500 put on quite a show considering it ended nearly flat for the week. When the S&P gapped down significantly Monday morning and continued to sell off, we had to look back to the beginning of 2018 to find levels of technical support (dotted lines). The extreme volatility the market has experienced since the beginning of 2018 can make a 2-year chart somewhat hard to interpret. Considering that the chart needs to display the December 26, 2018 low of 2,346.58 through the high of 3,016.21 set on July 26, 2019, the chart can look quite messy, with support levels seemingly close together and individual candles very hard to make out.
When looking at a 3-month chart that displays less range from top to bottom, you can see that these levels of support are not nearly as close together as they appear on a 2-year chart. This really showcases how extreme recent movements have been when compared to more normal markets. The levels of support at 2,820 and below are significantly stronger than those above, but technical analysis really works best when the market isn’t being driven by news headlines.