Market Commentary - Week ending August 2, 2019

In the markets:

U.S. Markets:  U.S. stocks suffered their worst week of the year as investors were hit by the twin blows of disappointing signals from the Federal Reserve and the announcement of new tariffs on imports from China.  Most of the markets’ declines came late in the week as both trading volumes and volatility spiked. The Dow Jones Industrial Average gave up 707 points, or -2.6%, to finish the week at 26,485. The technology-heavy NASDAQ Composite plunged -3.9% barely holding on to the 8,000 level at 8004.  By market cap, the large cap S&P 500 index finished down -3.1%, while the mid caps were hardest hit, off -3.5%. The small cap Russell 2000 managed a lesser -2.9% decline.

International Markets:  Like the U.S., international markets were a sea of red last week.  Canada’s TSX gave up -1.6% while the United Kingdom’s FTSE retreated -1.9%.  France’s CAC 40 plunged -4.5%, Germany’s DAX lost -4.4%, and Italy’s Milan FTSE finished down -3.6%.  In Asia, China’s Shanghai Composite and Japan’s Nikkei each fell -2.6%. As grouped by Morgan Stanley Capital International, developed markets retreated -2.8% while emerging markets plunged -5.0%.

Commodities:  Gold benefited from the weakness in equities markets, rising 2.7% to $1457.50 an ounce, but Silver finished the week down -0.8% at $16.27 an ounce.  Crude oil gave up last week’s gain, finishing down -1.0% to $55.66 a barrel. The industrial metal copper, viewed by some analysts as a barometer of global economic health due to its wide variety of uses, plunged -4.2%.

July Summary:  July was a modestly positive month for U.S. markets.  The Dow rose 1.0% and the NASDAQ added 2.1%. The S&P 500 gained 1.3%, the mid cap S&P 400 rose 1.1%, and the small cap Russell 2000 rose the least, adding 0.5%.  International markets were not so unanimously positive, however. Canada’s TSX added 0.2% and the UK’s FTSE rose 2.2%, but France’s CAC 40 gave up -0.4% and Germany’s DAX lost -1.7%.  China’s Shanghai Composite retreated -1.6%, while Japan’s Nikkei rose 1.2%. Developed markets as a group gave up -2% while emerging markets as a group fell a steeper -2.7%. Gold rose 1.7% in July, Silver surged 8%, while oil added just 0.2%.  Copper ended the month down -1.7%.

U.S. Economic News:  The number of Americans claiming first-time unemployment benefits rose last week, but remained near historically low levels.  The Labor Department reported initial jobless claims rose by 8,000 to 215,000. Economists had expected new claims would total 210,000.  The number remains far below the key 300,000 threshold analysts use to gauge a “healthy” jobs market and near 50-year lows. The more stable monthly average of new claims fell by 1,750 to 211,500.  Continuing claims, which counts the number of Americans already receiving benefits, rose by 22,000 to 1.69 million. That number is also near a 40-year low.

The Bureau of Labor Statistics reported the U.S. added 164,000 new jobs in July holding unemployment near its 50-year low of 3.7%.  The strong jobs report underscored the strength of the U.S. labor market that shows little sign of deterioration despite an economy facing growing headwinds.  The increase in new jobs was in line with economists’ forecasts. Analysts note, however, that the lowest unemployment rate since the late 1960’s is not generating the kind of wage increases workers used to receive when the labor market was this tight.  In the past wages typically rose as much as 4% a year when unemployment was extremely low—currently wages are up just 3.2%. In the report, professional and business services led the way in hiring adding 31,000 jobs, while healthcare companies added 30,000, and social assistance providers increased by 20,000.  Employment fell for sixth month in a row among retailers and media and information services also shed jobs.

Pending home sales (the number of homes in which a sales contract has been signed, but not yet closed) rose in June helped by gains in the western part of the U.S.  The National Association of Realtors (NAR) reported pending home sales rose 2.8% across the country, with each of the four major regions reporting gains. Compared to the same time last year, sales were up 1.6%--their first year-over-year gain in 17 months.  From the same time last year, pending home sales were up 0.9% in the Northeast, 1.7% in the Midwest, 1.4% in the South, and 2.5% in the West. Lawrence Yun, chief economist for the NAR wrote in the release, “Job growth is doing well, the stock market is near an all-time high and home values are consistently increasing.  When you combine that with the incredibly low mortgage rates, it is not surprising to now see two straight months of increases.”

Despite the increase in pending homes sales, the growth in home prices slowed further in May according to the latest report from S&P CoreLogic.  The Case-Shiller 20-city home price index rose 0.1% in May compared with April. On an annual basis, prices were up 2.4% compared with a 2.5% annual rate the prior month.  That marks the 14th consecutive month in which the annual rise in home prices has slowed and is the slowest growth rate since August 2012.  Home prices have been slowing since March of 2018 and lower mortgage rates haven’t been able to stop the trend. Reviewing some of the hot-spots, the Case Shiller report showed that Seattle home prices are down -1.2% from last year, but home prices in San Francisco and Las Vegas continued to increase—up 1% and 6.4%, respectively.

In a widely-expected move, the Federal Reserve cut interest rates this week, but the amount and the message disappointed financial markets.  Stocks dropped after Fed chief Jerome Powell cut interest rates by a quarter point but implied that this might be a one-and-done deal instead of the first of several such cuts.  Markets were apparently hoping for a more aggressive monetary-easing campaign. Instead, Fed Chairman Jerome Powell described the interest-rate cut, the first since the 2008 financial crisis, as a “mid-cycle adjustment” that will hopefully get the economy going again.  In addition, Powell stated he didn't see the cut as the “beginning of a lengthy cutting cycle.” Markets sensed the Fed was less dovish than hoped as soon as the statement was announced, but dropped sharply once Powell rejected a large amount of easing. The Fed also said it was ending the program to shrink its balance sheet, known as quantitative tightening, on Aug. 1--two months earlier than planned.

Confidence among the nation’s consumers surged to a nearly 18-year high, the Conference board reported this week.  The board’s consumer confidence index jumped 11.4 points to 135.7 in July, blowing away economists’ forecasts for a reading of 126.  Confidence took a dive in June after trade talks with China hit an impasse and President Trump threatened to apply tariffs to all Mexican exports in a dispute over security at the Southern border.  In the details, the present situation index, a measure of how consumers view the economy right now, rose to 170.9 from 164.3. Another index that asks consumers their views of the future also advanced.  Both indexes are near the highest levels of the current economic expansion that began in mid-2009. Lynn Franco, director of economic indicators at the board stated, “These high levels of confidence should continue to support robust spending in the near-term despite slower growth in GDP.”

The University of Michigan reported that the final reading of its consumer-sentiment index for July rose as well, up 0.2 point to 98.4 in July.  Economists had expected a reading of 98.5. The index of consumer expectations rose while that for current conditions fell. Recent surveys have shown the most favorable personal finance expectations since late spring of 2003, but consumers have also begun to take precautionary measures to increase savings and reduce debt.  Attitudes toward buying homes and vehicles have significantly receded from their cyclical peaks despite declining interest rates, the University of Michigan said.

Nathaniel Hoskin

Written by Nathaniel Hoskin

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