Weekly Market Commentary

More money managers are feeling less bullish, but you sure couldn’t tell by the performance of U.S. stock markets last week.

So far, 2019 has been a tremendous year for U.S. stocks. Through the end of last week, the Standard & Poor’s 500 Index had gained more than 20 percent year-to-date, the Dow Jones Industrial Index was up more than 15 percent, and the Nasdaq Composite had risen more than 24 percent.

Last week was like an overstuffed suitcase that busts open on the baggage carousel. A lot was unpacked in a surprising and disorderly fashion.

There was some positive news for investors who prioritize fundamentals. Third quarter’s earnings season – the period of time when companies let investors know how they performed during the previous quarter – got off to a strong start.

The world breathed a sigh of relief last week when the United States and China took a step toward a trade-war truce.

Financial Times reported the United States agreed to not increase tariffs from 25 percent to 30 percent on $250 billion of Chinese imports next week. (Current tariffs remain in place, and it is possible new tariffs will be imposed on additional Chinese goods – electronics, apparel, and other consumer items – in mid-December.)

In return, China agreed to purchase $40 to $50 billion of agricultural goods, including soybeans and pork, although no time frame was established for the purchases. It remained unclear what progress was made on intellectual-property protection and rules to prevent currency manipulation, reported The Wall Street Journal (WSJ).

The Markets

From trade wars to impeachment inquiries, investors had a lot to ponder during the third quarter. Toward the end of September, they appeared to become more cautious, although it’s difficult to say which issues weighed most heavily. Here are a few questions they may have been asking:

Is recession looming closer?

The Markets

They say bull markets climb a wall of worry.

Investopedia’s Will Kenton explained the idea like this:

“…a bull market isn’t a peaceful place. When times are good, investors are constantly tense, wondering how long they will keep rolling, fretting about when a seemingly inevitable correction will finally put a stop to the market elation. As a market continues ascending, the decision can become increasingly agonizing whether to take profits in a position or let it ride.”

Last week, the wall of worry gained a few feet.

There’s a new theory in town.

Renowned economist Robert Shiller’s new book suggests investors may be able to predict and prepare for economic events by tracking popular stories.

Applying the theory might have been a challenge last week. There were so many stories with potential to move markets and affect the economy it was difficult to guess which would be the most influential.

In the end, on-again-off-again trade negotiations provided the spark that drove markets lower. Barron’s explained:

Where’s inflation?

If you enjoy searching for Waldo, the visual nemesis in a red-striped sweater and cap, you may appreciate the quandary of central bankers in many wealthy nations. For almost a decade, they’ve been they’ve been trying to find inflation.

Last week, there were reports of a sighting in the United States.

Remember the movie Groundhog Day?

Bill Murray’s character is a crotchety newsman who lives the same day over and over again. After exhausting other options, he chooses self-improvement and eventually escapes the cycle.

The movie came to mind last week when the United States and China headed to the negotiating table. Again.

What, me worry?

About this time last year, Time Magazine reported on anxiety in America. Almost 40 percent of Americans reported being more anxious than they were the previous year.

The performance of stock and bond markets this summer may have pushed those numbers higher.

Last week finally brought some relief. It was the best week for major U.S. stock indices since June. The Standard & Poor’s 500 Index, Dow Jones Industrial Average, and Nasdaq Composite all gained between 2 and 3 percent, reported Ben Levisohn of Barron’s.

How can investors cope if volatility continues?

Have you ever watched a lake in a thunderstorm?

Heavy rain pummels the surface. Dark clouds drop the sky closer to the water. Gusty winds crash waves ashore. Up top, on land, damage may occur. Underneath, in the deeper water, things often remain pretty much the same.

Last week’s stock market volatility was like a thunderstorm on a lake. Markets were doing well until the squall brewed up on Friday. Ben Levisohn of Barron’s described it like this:

Global selloff. Quick comeback.

Investors boomeranged from stocks to safe havens and back as trade tensions between the United States and China intensified last week. The Economist reported:

“On August 1st President Donald Trump warned that he would soon impose a 10 percent levy on roughly $300bn-worth of Chinese goods that have not already been hit by the trade war. Four days later China responded by giving its exchange rate unaccustomed freedom to fall. The yuan weakened past seven to the dollar, an important psychological threshold, for the first time in over a decade. And stock prices in America duly fell...”

Global selloff. Quick comeback.

Investors boomeranged from stocks to safe havens and back as trade tensions between the United States and China intensified last week. The Economist reported:

“On August 1st President Donald Trump warned that he would soon impose a 10 percent levy on roughly $300bn-worth of Chinese goods that have not already been hit by the trade war. Four days later China responded by giving its exchange rate unaccustomed freedom to fall. The yuan weakened past seven to the dollar, an important psychological threshold, for the first time in over a decade. And stock prices in America duly fell...”

Tariffs strike again.

The Federal Open Market Committee completed what it called ‘a mid-cycle adjustment’ with a quarter-point rate cut last week. Some investors were unhappy when Fed officials implied there would not be another reduction this year. They’d been hoping for at least one, reported Barron’s.

Despite the disappointment, investors settled and U.S. stock markets rallied on Thursday.

Then, like a movie villain that just won’t die, U.S. import taxes – a.k.a. tariffs – reared their ugly heads and wiped out the week’s gains. Barron’s explained:

It has been said there are two sides to every story. Just look at world financial markets. Stock markets and bond markets are telling very different stories.

In the United States, stock markets were blue ribbon winners last week.

The Standard & Poor’s 500 Index rebounded to a record high. The Nasdaq Composite also set a new record. Barron’s reported U.S. stock markets were supported by abundant optimism inspired by expectations for solid earnings growth and a Federal Reserve rate cut in July.

Did last week mark the start of a new policy for the Federal Reserve?

The U.S. Federal Reserve has a reputation for providing little transparency about the timing and direction of potential rate changes. That reputation was challenged last week.

The bulls are running.

Last week, the Standard & Poor’s 500 Index set a new record, closing above 3,000 for the first time. Other major U.S. stock indices also finished at record highs, reported Barron’s.

Company fundamentals, investor sentiment, and geopolitics all have the power to push stock prices higher. However, according to Financial Times, last week’s gains were attributed to Federal Reserve Chair Jerome Powell’s testimony before Congress and the expectation the Federal Reserve will lower the Fed funds rates in July.

What will the Federal Reserve do now?

There was unexpected economic news last week. On Friday, the Bureau of Labor Statistics announced 224,000 new jobs were added in June, which was more than analysts had anticipated. The gains were offset a bit by reductions in April and May employment estimates. However, overall, the pace of jobs growth during second quarter was fairly consistent with jobs growth during the first quarter, reported Matthew Klein of Barron’s.

In the infamous words of Mortimer Snerd, “Who’d a thunk it?”

After U.S. stocks dropped sharply during the last weeks of December 2018, investors were not optimistic about the future. Early in January 2019, the State Street Investor Confidence Index dropped to its lowest point since 2012, and the American Association of Individual Investors (AAII) Sentiment Survey showed just about 31.6 percent of investors as bullish. The long-term average for bullishness is 38.2 percent.

How things have changed!

Everything went up – and that’s unusual.

Randall Forsyth of Barron’s explained, “Like our major political parties, the stock and bond markets seem to live in two different worlds these days. The former sits at record levels, suggesting we live in the best of all possible worlds. The latter sees things as bad and only getting worse.”

Here’s what happened last week:

Are we on the cusp of change?

The United States is doing quite well. Randall Forsyth of Barron’s reported:

“…the U.S. economy and stock market both seem to be doing better than OK, thank you, as the expansion and bull market celebrate their 10th anniversaries. Unemployment is around the lowest level in a half-century. The worst thing seems to be that inflation continues to run slightly below the Fed’s 2 percent target, a problem that might strike some as similar to being too rich or too thin.”

The Markets

Surprise! It was a great week for markets.

Since the U.S.-China trade conflict resumed in early May, investors have been off balance. The possibility of escalating tariffs on Mexico heightened economic uncertainty. Then, last week’s unemployment report arrived with less than stellar news – just 75,000 jobs were created in May. The number was well below expectations. The Bureau of Labor Statistics revised March and April employment numbers downward, too.

We know investors hate uncertainty. So, why did major U.S. indices rally?

Tariff trouble.

Just two weeks ago, the U.S. government lifted tariffs on Mexico and Canada. So, it was a surprise last week when President Trump tweeted the United States would impose an escalating tariff on all goods imported from Mexico until the flow of migrants to the United States’ southern border stops.

U.S. stocks have had a great run.

During the past decade, the profitability of U.S. companies increased rapidly. Strong corporate earnings helped the U.S. stock market outperform markets in other nations by a significant margin. According to Capital Economics, “Since the start of this decade, the average annual return from the MSCI USA index of mid- and large-capitalization U.S. equities, which closely tracks the S&P 500, has been roughly 13 percent. This compares to only 7 percent from the MSCI World ex USA index of comparably-sized equities in 22 other developed economies.” Performance was measured in local currency.

Through the end of April, year-to-date returns for U.S. benchmark indices were soaring. T. Rowe Price reported, “Stocks recorded solid gains in April, continuing their strong start to the year. The S&P 500 and Nasdaq Composite Indexes hit new all‑time highs at the end of the month, while the other major benchmarks remained modestly below the peaks they established in the fall of 2018…Renewed confidence in the global economy seemed to be a primary factor boosting sentiment in April.”

Trade war trade-off.

There was some good news on trade, last week. The United States took steps to reduce trade friction with the European Union, Canada, Mexico, and Japan.

Trade talk trouble took a toll last week.

Major U.S. stock indices moved lower when trade talks between the United States and China broke down. The Standard & Poor’s (S&P) 500 Index, Nasdaq Composite, and Dow Jones Industrial Index all finished the week down between 2 percent and 3 percent, reported Ben Levisohn of Barron’s.

Despite the weak weekly performance, the S&P 500 remains up 14.9 percent year-to-date.

The Standard & Poor’s 500 Index is off to its best start in 20 years.

Despite the exceptional performance of U.S. stock markets year-to-date, and data that suggest economic growth remains steady, some analysts and investors have been pecking at Federal Reserve Chair Jerome Powell. They’re keen for the Fed to implement a rate cut, which could stimulate economic growth and help push stock markets higher, because inflation is lower than ideal, reported Howard Schneider and Ann Saphir of Reuters.

It wasn’t an ‘Avengers End Game’ spoiler, but there was big news last week.

Economic growth in the United States was strong during the first quarter. The Bureau Of Economic Analysis (BEA) announced gross domestic product (GDP), which is the value of all goods and services produced in the United States, increased by 3.2 percent.