Week Ending 9/6/2019


  • 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.


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.


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%.


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.


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.


Week Ending 8/30/2019


  • 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.


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.


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.


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.


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.


Week Ending 8/23/2019


Stocks fell by 1.38% in the US and 0.70% outside the US amidst more trade problems.

Fed Chairman Jerome Powell said that future interest rate cuts are possible, but he made it clear that the Fed can only do so much in face of a trade war. “While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade. “Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Mr. Powell said, adding that there were “no recent precedents to guide any policy response to the current situation.”

Week Ending 8/16/2019


Both US and international stocks fell by about 1.1%, down for the third straight week. The entire psychology of the market has changed since Trump’s trade tweet a few weeks ago. Investors are worried about the threat of a coming recession. Stocks are now 4.6% off their recent high from July 26, but there have been some wild days since then. The S&P 500 is now working on 12 straight days of intraday moves greater than 1%.

The yield on the 30-year bond fell to 1.98% on Thursday. That was the lowest yield of all time. Also, on Thursday, the 10-year fell to 1.47%, not far from the all-time low of 1.36% from July of 2016. While the 3-month/10-year curve has been inverted for a while now, the 2-year/10-year also inverted intraday during the week, a recessionary signal. There is now $16 trillion in negative-yielding debt around the world.

Stocks rallied on Tuesday when Trump delayed a portion of the new tariffs that he recently announced. But then the market really got hit on Wednesday, down 2.9%, on weak economic data from Germany and trade tensions. On Thursday and Friday stocks did rally back, on a good retail spending report


Week Ending 8/9/2019


Stocks wavered between down, then up, and then down, finally finishing off by 0.44% in the USA and 1.10% outside the US. US stocks got hammered on Monday, falling about 3%, after the Chinese yuan broke through the psychologically important level of 7:1 versus the US dollar. A beggar-thy-neighbor mindset seems to be spreading. World leaders should know better, mercantilist policies have not worked in the past and won’t work this time. Stocks did gain on Tuesday, Wednesday, and Thursday when there was no further escalation in the currency/trade wars and there was actual hope (again) that maybe the countries would come to some sort of agreement. Stocks went into Friday up for the week, but Trump seemed to indicate that China may not show up for a September trade meeting, turning stocks down by 0.7% on the day and off by 0.44% for the week.

Treasury yields fell off a cliff. The 10-year dropped by 28 basis points to 1.74% for the week and fell below 1.6% during the week, the lowest level since 2016. The two-year fell by 9 basis points and the spread is now only 11 basis points. The 3-month/10-year curve is inverted by 26 basis points. The yield on the S&P 500 exceeds the yield on the 10-year by about 1/4%.

The exogenous shock of the trade war, now rolling into a currency war, represents the kind of unique factor that raises the chances of negative unintended consequences.




Week Ending 8/2/2019


Stocks lost ground every day this week. On Wednesday, losses were due to Fed Chair Jay Powell’s comments on the rate cut (see further below). But the losses accelerated on Thursday and Friday after Trump announced more tariffs on China. For the week, US stocks were down by 3.13%.

Trump said Thursday he will extend tariffs to almost all Chinese imports effective September 1. The tariffs would hit about $300 billion in Chinese goods
and stretch across a wide range of consumer products. The news shook Wall Street. The Dow, which was up by more than 300 points, dropped to a loss of 281,
falling 1.1% on the day. Oil fell by 8%, the most since February of 2015. The new set of tariffs throws more uncertainty into the future course of the economy, and the most recent Fed rate cut may not be enough to help. Powell said on Wednesday (before the new set of tariffs) that “There isn’t a lot of experience in responding to global trade tensions.” Mainly, because the world has been smart enough to avoid large scale
trade wars since the disaster of the Smoot-Hawley tariffs in 1930. But no longer. These are self-inflicted wounds and if Trump follows through it can’t be good for the economy. Trump’s mindset is that the higher tariffs would put more pressure on the Chinese to agree to a trade deal. But Chinese might be willing to hold out. This is the danger of trade wars, one side makes a move, the other makes a counter move, each time expecting the other country to cave, and then egos get involved, and everyone is too proud to compromise. And with Trump, you are dealing with a major ego who seems willing to sacrifice the entire US economy for a “win”.

We said in our recent webinar titled “Don’t Fight the Fed,” that one threat that could derail this market rally would be a ramp-up in the trade war. Well if Trump follows through on this newest set of tariffs, that would certainly qualify. We are also moving into a time of year (August through September) where a weak August has led to a sizable drop in October (think 1929, 1987, 2007).

The tariffs to date have already hit the global economy, while the US has slowed down (mainly due to tariffs) it is still in a slow moderate growth mode. But how many times can this economy and market take these kinds of hits without a more severe consequence?

Already, recent market peaks have coincided with Trump’s announcements on tariffs. The January 2018 selloff of 10.16% began when Trump announced tariffs on solar panels and washing machines. That was the first big move in Trump’s turn toward protectionism. The selloff of about 20% that began in September of 2018 began when Trump finalized a list of products subject to tariffs on $200 billion in imports from China.

At least there was one piece of good trade news this week. The US and Japan are close to finalizing a limited trade pact that will increase US farm exports to Japan in exchange for dropping the threat of auto tariffs on imports from Japan.


The Bureau of Economic Analysis updated its personal income data on Tuesday and reported that employee compensation rose by 4.5% in 2017 and 5% in 2018. Compensation increased by 3.4% through the first six months of this year. These are upward revisions and above recent trends and indicative of the positive benefits of Trump’s early policies including tax reform which encouraged business investments, and deregulation. All of which occurred before Trump switched gears to concentrate on tariffs.


The Fed cut rates for the first time since 2008 hoping to head off a near-term recession. The market did not cheer the announcement as Fed Chair Powell did not indicate that there would necessarily be follow-through. Powell said the cut was a “mid-cycle adjustment.” The S&P 500 fell by 1.1% for the day.

There is a question if a quarter-point cut is even worth it, Catherin Mann, the chief global economist at Citigroup said, “The real issue facing the global economy is trade uncertainty, and monetary policy is not well-targeted to address that uncertainty.”


Week Ending 7/26/2019


  • US stocks close at a record high.
  • GDP is up by 2.1%.
  • IMF growth projections revised down.
  • Congress and the White House agree on a budget deal that worsens the deficit.
  • Boris Johnson is Britain’s new PM increasing the odds of a hard Brexit.
  • ECB signals more easing on the way.
  • German manufacturing PMI continues to fall.
  • West Coast home prices decline.


US stocks were up for the week by 1.72% and closed at a record high on the back of strong earnings reports and a hoped-for interest rate cut coming up this week. UPS, Google, Twitter, and Starbucks all had strong earnings. Q2 GDP was up by 2.1% in Q2, better than the 2% consensus estimate, but the International Monetary Fund cut its worldwide growth prospects for 2019 and 2020, by 0.1%, to 3.2% and 3.5%. This is on top of earlier cuts, blaming trade tensions. Referring to trade, the IMF wrote that “Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted.”


The U.S. economy expanded by 2.1% in Q2 with the help of a strong consumer. That was down from the 3.1% clip in Q1 but higher than anticipated. Consumer spending increased at an inflation-adjusted annualized rate of 4.3%. Uncertainty over trade was a factor in causing business investment to fall by 0.6%. Exports fell by 5.2% while imports were up slightly.


Congress and the White House reached a deal that makes everyone happy, except those who care about the fiscal soundness of the United States. The deal suspends the debt ceiling until July of 2021 and allows for more than $320 billion in spending above the limits set in the 2011 budget law. Republicans got higher spending for the military and Democrats got more spending for everything else.


Boris Johnson became the new Prime Minister of Britain, increasing the chances of a hard Brexit in October. Johnson seems confident he can negotiate a new deal, but that might be a problem since the EU as said repeatedly that the pact is non-negotiable. Furthermore, Johnson’s grip on government is fragile at best, he is part of a minority government that is essentially holding on by a string, subject to the whims of just three defecting lawmakers.


The ECB is signaling that it will cut short-term rates and restart their bond-buying program sometime soon. ECB President Mario Draghi says the economic outlook “is getting worse and worse”, especially in manufacturing (see below). Draghi is aiming to overshoot the banks 2% inflation target.


Germany purchasing managers index dropped to 43.1 in July from 45 in June. “The health of German manufacturing went from bad to worse in July…raising the risk of the euro area’s largest member state entering a mild technical recession,” said Phil Smith, an economist at IHS Markit. Germany’s services PMI still remains in the expansionary territory at 55.4, as does the composite at 51.4.


West coast home prices have declined for the first time since 2012 and home sales across the country fell by 2.2% in June, another indication that the long-awaited recovery in home sales has not yet arrived.


Week Ending 7/19/2019


  • Stocks were down in the US by 1.18% and by 0.34% outside the US.
  • China and the US are “a long way” from a trade deal, according to Trump.
  • Tensions with Iran increase.
  • Earnings are coming in better than expected but still projected to be down year over year.
  • The consumer is in good shape as indicated by a strong retail sales report.
  • More interest in gold as the miners jump by almost 7%.


US stocks fell by 1.18% and international stocks dropped by 0.34%. The S&P 500 did close at a record high on Monday but fell on Tuesday and Wednesday after Trump said that China and the US were “a long way” from a trade deal. Stocks rallied on Thursday when John Williams, president of the New York Fed, said that “it pays to act quickly to lower rates at the first sign of economic distress.” On Friday, stocks gapped higher at the open but closed at the low for the day, it was reported that the US Navy shot down an Iranian drone and that Iran had seized a British-flagged oil tanker. Despite tensions with Iran, oil fell by 7.5% for the week, as inventory levels have been increasing around the world and the growth forecast for oil demand was revised down by 100,000 barrels by the International Energy Agency.


Earnings have been coming in better than expected so far, but still look like they will be down year over year. About 15% of S&P 500 companies have now reported, and earnings are projected to fall by 2.1% from last year, according to FactSet. That is better than the 3% decline as of the end of June.

Netflix took a big hit when after the company announced a decline in subscribers for the first time in almost 10-years. The stock fell by about 10%.


Retail sales increased by a strong 0.4% from May to June and by 3.4% year over year. April and May’s sales were revised down, but the June increase was above expectations. Overall, this was considered a positive report and indicates the consumer is still in good shape. That was also reflected in strong earnings by the banks, which were helped by consumer lending, and by the airlines, based on planes filled with travelers. Jamie Dimon, CEO of JP Morgan said, “The consumer in the United States is doing fine. Business sentiment is a little bit worse, most probably driven by the trade war.”


We wrote that gold might be breaking higher on June 21 and it looks like traders are anticipating more. The GDX, an ETF composed of gold mining stocks, surged by 6.8% this week even though the base metal only increased by 0.7%. With global tensions around the world high (Iran/US) and interest rates ridiculously low, and maybe sniffing out unexpected inflation down the road, gold is catching interest. The long-term chart of gold below shows how gold has performed when it has cleared resistance lines.


Week Ending 7/12/2019


  • US stocks were up by 0.70%.
  • Fed Chair Powell seems to have given the go-ahead to a rate cut later in the month.
  • A rate cut in a growing economy, with unemployment at close to record lows, with no liquidity crisis, and markets at all-time highs would be unusual to say the least.
  • But it does bring back memories of 1924 and 1998.


Stocks continued their march higher, advancing by 0.70% for the week, as Fed Chair Jerome Powell pretty much confirmed that a rate cut is on the way.


Federal Reserve chair Jerome Powell seemed to give the green light to an interest rate cut later in the month in testimony to Congress this week. While Powell did not say that a cut is definitely on the way, his testimony seems to be leaning that way. Powell highlighted risks to the economy including the trade war, a global economic slowdown, Brexit, and an exploding deficit. The idea now for a rate cut would be to reduce the risks of a recession before the wheels of the economy start moving downhill. Powell said: “The bottom line is, the economy is in a very good place, and we want to use our tools to keep it there.”

Usually, rate cuts happen when inflation is moving higher and/or there is visible stress in the economy. And usually, the Fed is starting from a higher base. Not this time. While the US economy is slowing it is still in slow-growth mode, asset markets are priced at all-time highs, the unemployment rate and the initial claims for unemployment are essentially at all-time lows. Liquidity is everywhere. A rate cut in an economic environment like this has harkened back memories to two other similar Fed moves.

New York Fed Chair Ben Strong cut rates in May, June, and August of 1924 to the lowest rates that were ever set by the Fed. The cuts were not in response to a weak US economy, but rather, to help Britain attract gold back into their country. The cuts led to a wave of speculation. The Fed eventually raised interest rates back to 4% but cut again in March of 1926, not because of a weak economy (the economic outlook was good), but because of a 9.1% sell-off in the Dow. Fed Board member Adolph Miller, the only dissenting vote, said this is “the most costly error committed by it or any other banking system in the last 75 years.” That led to more speculation and eventually the 1929 crash, helped along by a huge trade war (Smoot-Hawley tariff).

In 1998, the Fed reduced rates from 5.5% in September to 4.75% in November and would keep them flat until the following summer when they began to increase rates again. The Fed cut was in response to the Asian financial crisis, a Russian debt default and the near-collapse of the hedge fund, Long-Term Capital Management. The US economy was in good shape at the time, inflation was low, US equity markets were close to all-time highs, and markets were liquid. The market kept right on rising until the crash of 2000.

Time will tell what happens down the road, but for now, the age-old adage of “don’t fight the fed” appears to be the rule of the day.