September 13, 2019 – Stocks posted gains this week and major indices got back near all-time highs.
Meanwhile, the real action this week and last was over in the bond market. After a big rally in late July and August that helped tank stocks, bonds are falling, pushing yields higher. The yield curve is no longer inverted, and the yield on 10-year Treasuries ended the week at 1.898% after trading as low as 1.429% in August.
Economic data released this week also generally looked better. Today’s consumer confidence reading showed something of a rebound after a big drop last month. Inflation data out earlier this week, particularly the core numbers that strip out volatile commodity prices for things like food and energy, rose more than expected. These are perhaps positive signs that the economy is not as bad as feared, but it also raises some interesting questions about the future.
A lack of inflation and near-record low bond yields were among the reasons many people thought the Fed would be able to lower interest rates once or even twice more this year. With stocks and consumer confidence looking better and inflation data coming in higher than expected, some Fed voters may be less inclined to cut than they were a month ago.
Rate-cut odds tracked by the CME’s FedWatch tool have declined in the past week, even as President Trump tweeted this week that rates should be cut to zero or lower. This uncertainty about the Fed probably doesn’t provide much of an overhang to stocks, but if stocks rallied when everyone thought rates would go down, it stands to reason that enthusiasm would wane as the odds of more cuts fall.
Uncertainty is also the theme in the trade war. After ramping up tensions and tariffs in August, both sides seem to be trying to calm things down this week. China added some U.S. goods to a tariff waiver list and said it would encourage Chinese firms to buy U.S. agricultural products. The U.S. delayed tariffs that were supposed to begin on Oct. 1 by two weeks, pushing them back until after a holiday marking the founding of the modern communist nation.
There is talk of an interim deal between the two countries, as China is facing some shortages of pork and soybeans, leading to higher prices, while people close to President Trump are said to be increasingly worried about how the trade war effects his chances for re-election. What such a deal would look like is hard to imagine, which we believe is why the market’s reaction to the optimism has been relatively muted.
Since we’re back near new highs, some technical resistance will come in to play, but we believe developments on the trade front will likely overcome technical factors should there be any new developments.
On the week, the S&P 500 gained 0.96%, the NASDAQ gained 0.91%, and the Dow Jones Industrial Average gained 1.58%.