August Monthly Market Commentary
As many of us enjoyed the final month of summer, plenty of attention was focused on a somewhat bumpy August which delivered political turmoil, escalations in a trade war, and concern in the fixed income market. Overall, the stock markets ended the month down slightly, so sit back and catch up on some market moving news.
Here We Go Again…
After President Trump and President Xi met in June during the G20 Leaders Summit, the escalating trade war between the two superpowers took a much-needed pause. That all changed in early August, when President Trump imposed a 10% tariff on an additional $300 billion worth of Chinese goods.
Later in the month, China retaliated by increasing their tariffs from 5% to 10% on thousands of American products and reinstated a 25% tariff on automobiles. This prompted President Trump to raise tariffs from 25% to 30% on $250 billion worth of Chinese goods and 10% to 15% on an additional $300 billion worth of Chinese goods. Shortly after this response, China showed a desire to resolve the trade war with no further escalations.
Keep an eye on…
• The planned meeting between the two nations in September. The escalating trade tensions between the US and China have moved markets throughout the year. It makes sense that one way or another the upcoming meeting could have the same impact. Many economists and business leaders view the trade war as a major headwind for the global economy, so major news in either direction could either reinforce fears of a global slowdown or lead to optimism that they can resolve this conflict without further escalation.
• Retailers. The latest round of tariffs impact clothing and other consumer goods, which ultimately increases the cost of goods sold by retailers. This puts many retailers in a unique predicament of either passing along these costs to consumers by raising prices or reducing their profit margin by keeping prices somewhat consistent. The third option is for retailers to find new suppliers or renegotiate their purchases. Either way it will be interesting to see how retailers respond to the recent news.
• Agriculture. Agriculture might be the most visible casualty of the trade war after China cancelled the purchase of American agriculture goods. China is the fourth largest market for American agriculture products, so these recent escalations impact farmers across the country. As election season gains steam, you can expect this issue to stay top of mind as some early primaries and caucuses are in states that are especially impacted by agriculture.
Fixed Income Signaling Recession?
Normally the stock market gets all the attention, but it seems like August brought constant headlines about an impending recession signaled by the fixed-income market. Early in the month, the 10-year US Treasury yield fell below 1.5% and the 30-year fell to record lows. The 10-year is a common benchmark since it influences consumer and business loan rates.
The falling 10-year triggered a yield curve inversion, which has signaled every recession for the last fifty years.
Rather than hitting the panic button based on headlines, it is important to understand what happened. An inverted yield curve occurs when the yield on shorter-term bonds is higher than the yield on longer-term bonds.
Here, the headlines in August referred to the yield on the 2-year Treasury being higher than the yield on the 10-year Treasury. Looking back, inversions have occurred before every recession since 1956. It is important to remember that past recessions started on average 15 months after the inversion occurred.
Some experts argue that this time is different, since a major factor driving yields lower is the fact that trillions of
dollars of bonds around the world have negative yields. When someone buys a negatively yielding bond, they are paying the issuer for the right to loan them money. That may seem counter-intuitive. With negative yields around the globe, US Treasuries have attracted investors looking for yield and safety.
That is why some experts believe the yield curve inversion reflects the expectation by the market that the Fed will lower rates. Therefore if the Fed cuts rates accordingly, the yield curve inversion might not indicate an impending recession, but rather the market adjusting quicker than the Fed.
Keep an eye on…
• Strategy rather than headlines. Television shows, newspapers, and websites rely on people watching or reading their content. Catchy and negative headlines get people to watch and read content. Rather than letting headlines cause panic and lead to rash decisions, it is important to have a long-term strategy and understand what is important. Stay informed but keep your eye on the prize over the long term.
• Economic data and central bank meetings. September should provide plenty of key economic data and thoughts from central bankers around the globe. Even though the fixed income market headlines are negative, economic data has largely been positive. Monitor the reports in September to see if these trends continue.
• The Fed. On September 18, the Fed will make a highly-anticipated statement. The market expects a 25 basis point rate cut at its September meeting.
The Battle for Entertainment Heats Up
Technology continues to disrupt the way we consume entertainment, and there was some major news in August that applies to this sector.
Keep an eye on…
• Disney+. August brought news that Disney+ will launch on nearly every major streaming platform as they take on Netflix and other streaming services. With a low price point, popular content from their catalog, and an upgraded bundle including ESPN and Hulu, many investors and consumers are anticipating the November launch.
• Apple TV+. According to a report this month, Apple has committed to spend more than $6 billion on original content. Along with original content, Apple is targeting a launch prior to the November 12 launch of Disney+. New entries into the streaming space make the market fairly crowded with Netflix, Disney+, Hulu, Amazon, and NBC. Apple seems to bet that original content can be a differentiator in a crowded marketplace.
• CBS-Viacom. After a three year off-and-on courtship, CBS and Viacom have finally agreed to merge . With a market capitalization of roughly $18 billion, it still pales compared to other legacy media companies such as AT&T/Warner, Disney, and Comcast/NBCUniversal. This deal continues the trend of legacy media companies gaining size to compete against technology players such as Amazon, Apple, and Netflix.
The More You Know
During periods of volatility, it is common for investors to get rattled. It is important to understand that market volatility is normal. That’s why it’s important to have a little historical perspective. Looking back at the returns of the S&P 500 since 1949 :
• A 5% decline occurs on average three times per year
• A 10% decline occurs on average once per year
• A 15% decline occurs on average once every four years
• A 20% decline occurs on average once every seven years
It’s important to take a long-term perspective to investing and develop a strategy based on your goals, time horizon, and comfort with risk.
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The opinions and analysis expressed here are those of Brian Walsh as of August 30, 2019 and are for informational purposes only. Views may change as market, economic, and other conditions change. This information isn’t financial advice. Investment decisions should always be based on specific financial needs, goals and risk appetites.