MARKET RECAP

Stocks moved into record territory as the US up by 1.55% and international stocks advanced by 1.30%. As anticipated, the Fed cut rates by 1/4% and a strong jobs report indicated that a recession does not appear in the cards for at least the very near term. On the other hand, the Chicago PMI came in at a dismal 43.2, the lowest level since December of 2015, but that number might have been impacted by the GM strike. Q3 GDP growth came in at 1.9%, it was the third straight drop in growth, 10 basis points off the Q2 number. The early GDPNow estimate for Q4 is 1.1%.

FED

The Fed cut interest rates for the third time in 2019 by 1/4 point. The move was widely anticipated by the markets. The Fed indicated that there would need to be a deterioration in the economy for another rate cut.

JOBS

The US jobs machine put in another strong month, lodging an increase of 128,000 in nonfarm payrolls, and that was after a decline of 41,600 due to the GM strike and 20,000 temporary census workers leaving their jobs. The two prior months were revised up by 95,000. The unemployment rate increased to 3.6% as more Americans entered the workforce. Average hourly earnings were up by 3% year over year.

EARNINGS

Through Wednesday, about 75% of S&P 500 companies have reported earnings and 75% have beaten expectations. However, overall profits are forecast to fall by 3.2% from last year. That would make it three quarters in a row of declining earnings. Analysts are expecting positive earnings growth in 2020 and 2021 of about 6 and 7%, respectively, although those estimates will probably come down.

BUDGET DEFICIT

Last week the Treasury Department reported that the budget deficit for the year ended 9/30/2019 was $984 billion, up 26% from the prior year. Tax receipts were up by 4%, while outlays were up by 8.2%. This is now the fourth consecutive year of an increasing deficit and the current shortfall was 4.6% of GDP, which is the largest amount excluding a war or a recession. The worst part is no one in Washington seems to care, under the guise that deficits don’t matter. The risk is that at some future point they will matter, and by then it will be very difficult to deal with.

SCOREBOARD

Leon Cooperman’s common sense letter to Senator Warren, click to read.

No update this week but below is the scoreboard. Contact us with any questions.

MARKET RECAP

Stocks advanced by 0.63% in the US and by 0.92% overseas. International stocks have been outperforming since mid-August. The graph below charts the ratio of US stocks (VTI) to stocks outside the US (VXUS) and the declining black line shows the outperformance of the international stocks.

The market is expecting another Fed Rate cut at the end of the month, and that is providing support to equities. The Fed also has started to increase the size of its balance sheet, buying $60 billion a month of treasury bills, although they are not calling it quantitative easing. The Fed is buying the bonds to ensure that there is enough money around so that the gears of the banking system can move in sync without crashing, as came close to happening last month in the repo market.

SCOREBOARD

MARKET RECAP

US stocks were up this week by 0.60% and international stocks had a big week, +1.96%. Stocks managed the advance on optimism of a breakthrough on the trade front with China. On Friday, it was announced that China would buy more US farm products and the US would hold off on further tariffs. The agreement was characterized as “phase one.” There was even a hint of some progress with Brexit. US stocks are now only 2% off the all-time high. Bonds dropped by 1% on higher interest rates and the 3-month/10-year curve went back to normal status (not inverted).

FEWER JOB OPENINGS

Job openings were 4% lower than one year ago, the third straight monthly decline. That hasn’t happened since 2009. However, August’s job postings overall still were greater than the number of unemployed by about 1 million.

GLOBAL GROWTH

Two top World Bank officials warned that “the global economy is now in a synchronized slowdown,” those were the words of Kristalina Georgieva of Bulgaria, the no. 2 official at the World Bank. David Malpass, who is the World Bank’s President, referring to their June forecast of 2.6% global growth in 2019, said: “We now expect growth to be even weaker than that, hurt by Brexit, Europe’s recession and trade uncertainty.” International Monetary Fund research shows that the cumulative economic loss from the trade war could amount to $700 billion by 2020. That would represent about 0.8% of global gross domestic product.

SCOREBOARD

MARKET RECAP

Stocks fell early in the week as disappointing PMI reports raised recession fears but rallied on Thursday and Friday on decent jobs numbers. Investors are expecting another Fed rate cut later in the month. Interest rates dropped sharply on the greater likelihood of a recession.

For the week, US stocks dropped by 0.38% and international markets were down by 0.66%. Bonds had a big rally due to the lower interest rates, up by 0.80%.

PMI

The Institute for Supply Management Purchasing Managers Index for manufacturing came in at a bleak level of 47.8 for September, down from 49.1 in August. It was the lowest level since June of 2009.  The trade war has been a drag on the PMI. “Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019,” said Timothy Fiore, chair of the Institute for Supply Management.

A reading of less than 50 is considered contractionary. For the most part, past recessions have been preceded by a falling PMI that is less than 50, but there have also been false signals, including December of 2015 when the PMI hit 48 and August of 2016 when it hit 49.4.

Manufacturing only represents 8.5% of total employment and 11% of GDP. But a slow-down in the manufacturing sector can find a way to seep into the overall US economy. There was a sign that is happening as the non-manufacturing PMI fell sharply to 52.6 from 56.1.

JOBS

The decent jobs report shows that the economy is still hanging in there. The unemployment level fell to 3.5%, the lowest since December of 1969. Nonfarm payrolls increased by 135,000. That was less than the consensus estimate of 150,000, but the previous two months were revised up by 45,000. Wage growth month over month was flat, below expectations, year over years wages are up by 2.9%.

IMPEACHMENT

The impeachment process rolled on as the embarrassing political situation remains a complete mess and the chances, while still very early, seem to be increasing that the winner in 2020 will represent the extremes of their respective parties (Trump or Warren). Neither choice is encouraging.

SCOREBOARD

MARKET RECAP

US stocks dropped by 1.14% and international stocks were down by 1.23%. An impeachment inquiry began on Trump, the repo market needed more help, and Germany seems close to a recession, add on to that a word that the US might delist Chinese companies from US markets, and it was enough to push stocks lower for the week.

TRUMP

House Speaker Nancy Pelosi began an impeachment inquiry of Trump after a whistle-blower complaint that the President withheld military aid to Ukraine in order to pressure them to investigate Joe Biden and his son.

REPO MARKET

The Repo market was in need of continued help this week. The Fed injected $50 billion on Monday and then doubled that by midweek. The problems most likely stem from the draining of reserves from the system.

GERMANY

The German IHSMarkit composite output index entered contractionary territory for the first time since April of 2013. The rate of decline was the steepest in seven years. Growth in the service sector slowed sharply. For the manufacturing index, it was the eighth straight decline in output.

Phil Smith, Principal Economist at IHS Markit said: “Another month, another set of gloomy PMI figures for Germany, this time showing the headline Composite Output Index at its lowest since October 2012 and firmly in contraction territory. “The economy is limping towards the final quarter of the year and, on its current trajectory, might not see any growth before the end of 2019. “The manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009. With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”

WE WORK / PELOTON

We Work pulled its IPO last week after it was apparent that the public markets would not value the Company at any level close to its recent private valuations. Adam Neumann, We’s dynamic founder, subsequently stepped down after pressure from its lead investors.

Peloton didn’t have to pull back its IPO, but its offering did not go as expected, dropping 10% on its first day. Further evidence that the public markets are taking a more rational approach to valuation, and that artificially low-interest rates and easy money have given many start-ups and their private investors a sense that positive cash flow simply doesn’t matter, but ultimately, it does, at least recently.

SCOREBOARD

MARKET RECAP

Stocks were up for the third straight week as recession fears faded slightly and the chances for a trade deal supposedly improved. How many times have we heard that before? Trump delayed tariffs on some items and China did the same on pork and soybeans. The S&P 500 increased by 1%.

A strong consumer spending report for August showed that the threat of a looming recession might be overstated. Retail sales were up by 0.4% which was better than expected. Yields exploded higher, the 10-year increased to 1.901% on Thursday, up by 34 basis points, the biggest rise since June of 2013. The gap between the 3-month treasury bill and the 10-year bond significantly narrowed and is now inverted by only by .061 percentage point compared to 0.41% one week ago.

There was a shift in factor sentiment, as investors jumped into value and out of momentum. MTUM, the IShares Momentum Factor ETF fell by 2.35% while VLUE, the IShares Value Factor ETF increased by 4.02%.

If you are wondering how the economy can maintain its pace of slow growth in the face of an ever-increasing trade war, one reason would be the fiscal stimulus provided by a budget deficit that now exceeds $1 trillion dollars for the first 11-months of the year (4.4% of GDP). That is the first time the deficit has exceeded $1 trillion since 2012. It is possible that a surplus in September pulls the number lower, but the point is the deficit is exploding at a time when it should be declining.

Closing out his tenure as the ECB president, Mario Draghi announced a rate cut and the restart of quantitative easing.

SCOREBOARD

No scoreboard this week due to a software issue. It will be posted next week as normal. Sorry!

HIGHLIGHTS

• Stocks rally on word of a US-China meeting in October.
• Jobs are up but the pace is slowing.
• ISM falls into negative territory.
• Tariffs are cutting into US growth.

MARKET RECAP

US stocks rallied by 1.77% and international equities were up by 2.19%. Bonds were down by 0.18%.

The market broke through recent resistance and is only 1.77% off of the all-time high set on July 26th. Stocks certainly didn’t rally on economic news. Manufacturing in the US is now contracting (see ISM below), the jobs report was tepid at best, and Q3 growth estimates are at about 1.5% for both the Atlanta Fed’s GDPNow model and the NY Fed Nowcast, all indicating a slowing economy.

Apparently news that the US and China would meet in October was enough for the market to move higher.

While the rate of growth in the US slows, $17 trillion in negative-yielding debt around the world is creating a wave of support for equities.

JOBS

The US added 130,000 jobs in August, and that included 25,000 census workers The amount of jobs being added has been falling the last few months. A bright spot, average hourly earnings were up by 3.2% and has now been over 3% for more than a year. The unemployment rate was unchanged at 3.7%.

ISM

The Institute for Supply Management’s manufacturing index fell to below 50 for the first time since August of 2016. The reading came in at 49.1, below 50 is considered contractionary. Trade was cited as the biggest concern by executives.

Manufacturing only accounts for 11% of US output. So a weak reading does not necessarily measure the entire US economy. The overall job market continues to be solid and recent consumer spending numbers were strong. But this is a piece in the puzzle. In the past, when the ISM fell below 50, it has preceded a recession (shaded areas below) some of the time (see red arrows below) but not all of the time.

IMPACT OF TARIFFS

According to a new research report from economists at the Federal Reserve, the uncertainty created by trade policy has cut about 0.8% from US and global economic output in the first half of 2019. That number will increase to greater than 1% due to more recent developments.

SCOREBOARD

HIGHLIGHTS

• Stocks were up around the world.
• Consumer spending remains strong.
• Foreign investment is flowing into the US due to negative interest rates.
• The next round of tariffs starts today.
• PMI reports later this week.

MARKET RECAP

US stocks rallied during the week advancing by 2.57% while international stocks followed with a 2.24% advance. Bonds were up by 0.31% as rates fell slightly.

CONSUMER SPENDING / LOW GAS PRICES

Personal-consumption expenditures increased by a seasonally adjusted 0.6% in July, an indication that US households remain strong. Jack Kleinhenz, the chief economist at the National Retail Federation, said: “As long as we see a strong job market…the direction of the economy continues to be on track: positive but slowing.” Low gas prices have buoyed the spirits of consumers. A gallon of regular gasoline is down $0.30 from one year ago according to the price-tracking firm Gas-Buddy. The low prices are providing a tailwind to the economy, helping offset some of the negative impacts of the trade war.

FOREIGN INVESTMENT FLOWING INTO THE US

The barrage of negative yields around the world is one factor that has been helping support US markets. There is now $17 trillion in negative-yielding debt around the world. 10-year German Bunds have a -0.7% yield, while Italy, which has a barely functioning government, yields less than 1%. Thus, US debt, yielding around 1.5% or so, is attracting an avalanche of overseas investors. Foreigners bought $64 billion of US stocks and bonds in June, the largest amount since August of 2018, according to Treasury Department data. This has lowered yields on debt and kept equities close to their highs, despite a more threatening economic outlook.

ANOTHER ROUND STARTS TODAY

The newest round of tariffs kicks in today on about $110 billion in Chinese goods. This will be a 15% tariff that hits consumer products like footwear, apparel, home textiles, and some technology products like the Apple Watch. Another round that will impact $160 billion in goods is scheduled for December 15.

Not to be outdone, China rolled out their own tariffs today on about $75 billion of US goods, impacting factories and farms across the Midwest and the South.

In an August report, the non-partisan Congressional Budget Office estimated that by 2020, the tariffs/trade war will lower US GDP by 0.3% and reduce the average real household income by $580. JP Morgan wrote that the cost to the average US household will be $1,000 per year.

PMI’s This Week

The purchasing managers’ index reports from around the world will be released later this week. That will give a hint as to the direction of the world economy and what the impact of the trade war has been and likely to be.

SCOREBOARD