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MONTHLY MARKET INSIGHTS | August 2019

MONTHLY MARKET INSIGHTS | August 2019

August 13, 2019
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US Markets

Stocks raced to new highs in July, propelled by an expected cut in interest rates and better-than-expected corporate earnings.

Despite a sharp sell-off on the final day of the month, the Dow Jones Industrial Average tacked on one percent, while the Standard & Poor’s 500 Index rose 1.31 percent. The NASDAQ Composite lead with a 2.11 percent gain, leading markets for the second consecutive month.1

The markets opened the month higher on news from the G-20 (Group of 20) that America and China would resume trade negotiations. However, prices faltered as a strong jobs report caused some to worry the Fed would further postpone cuts to interest rates.

Dow 27,000

In Fed Chairman Jerome Powell’s testimony to Congress during the following week, he spoke of economic uncertainties, which many interpreted as a signal that a rate cut was coming. Investor confidence ran high, pushing the Dow over 27,000 and the S&P 500 past 3,000 for the first time.2

Eyes on Earnings

With Powell’s testimony over, attention quickly turned to earnings season and the business climate in 2019 and beyond. Profits and forward guidance were generally better than most feared.

Recent FactSet data shows 44 percent of the companies in the S&P 500 have reported quarterly results, and 77 percent have posted earnings above estimates. Nevertheless, FactSet projects that overall earnings will be 2.6 percent lower once all the results are finalized.3

Fed Gives Mixed Signal

On the last day of the month, the Fed announced plans to cut the federal funds rate by 25 basis points, or a quarter of a percent. Policymakers justified the move by pointing to global economic weakness, below-target inflation, and a desire to sustain America’s economic expansion.

Stocks dropped following the Fed’s press conference. Although the rate cut was widely anticipated, investors grappled with comments that suggested the Central Bank may not make further cuts. Fed Chair Powell called the July rate cut a “mid-cycle adjustment” and suggested that for further cuts, “wait-and-see” will be their approach.4

Sector Scorecard

Most industry sectors moved higher in July, with gains in Communication Services (+4.49 percent), Consumer Discretionary (+3.15 percent), Consumer Staples (+4.15 percent), Financials (+3.15 percent), Industrials (+1.21 percent), Materials (+0.62 percent), Real Estate (+1.14 percent), Technology (+5.77 percent), and Utilities (+1.11 percent). Energy (-2.37 percent) and Health Care (-0.21 percent) saw losses.5

What Investors May Be Talking About in September

Since the Fed began signaling in January that it was likely to ease up on its monetary tightening, markets have raced ahead on expectations that verbal signals would eventually be followed by concrete action.

Even though markets anticipated the July 31 cut, investors remain uncertain whether this rate cut would represent a one-time event or the start of an extended easing cycle.

The Fed’s Outsized Influence

Should the Fed decide no further cuts are necessary, it may force investors who adapted their portfolios in anticipation of further cuts, to reevaluate their positions.

In the coming months, the Federal Reserve will likely exert an outsized influence on markets, even as investors’ attention remains focused on the ongoing China trade talks and key economic markers.

World Markets

International equities moved in the opposite direction of U.S. stocks, as the MSCI-EAFE Index slipped 1.16 percent in July.6

Most European markets retreated on economic weakness, uncertainty over trade, and the growing likelihood that Britain could exit the E.U. without a deal.

Germany lost 1.69 percent, and France slipped 0.36 percent. Great Britain, however, picked up 2.05 percent.7

Pacific Rim stocks were mixed. Hong Kong fell 2.68 percent, on rising domestic tensions. Australia gained 2.93 percent, while Japan dropped 0.94 percent.8

Indicators

Gross Domestic Product

Economic growth slowed in the second quarter, with the GDP showing a gain of 2.1 percent. Consumer spending continued strong, but business investment declined, shrinking for the first time since 2016.9

Employment

The unemployment rate ticked higher, rising to 3.7 percent from 3.6 percent, even as nonfarm payrolls rose by 224,000. Wages grew 3.1 percent from a year earlier.10

Retail Sales

Spending jumped 0.4 percent in June, evidencing the continued strength of the consumer. Compared to June 2018, retail sales were higher by 3.4 percent.11

Industrial Production

Industrial production was unchanged from the previous month.12

Housing

Housing starts declined in June by 0.9 percent.13

Existing home sales fell 1.7 percent month-over-month and slipped 2.2 percent year-over-year – the 16th consecutive month of year-over-year sales declines.14

Sales of new homes accelerated in June, jumping 7.0 percent after two straight months of declines.15

Consumer Price Index

Consumer prices moved 0.1 percent higher in June. Excluding the more-volatile food and energy categories, inflation rose by 0.3 percent.16

Durable Goods Orders

Orders for long-lasting goods rose 2.0 percent, exceeding consensus estimates and representing the fastest growth rate since August 2018.17

The Fed

The minutes from the latest Federal Open Market Committee seem to suggest the Fed was leaning toward a cut in the federal funds rate amid concerns regarding global economic growth, continuing trade tensions, and an inflation rate that was mired below its benchmark target of 2 percent.18 The Fed cut its federal funds target rate by 25 basis points on July 31.

 

  1. The Wall Street Journal, July 31. 2019
  2. CNBC.com, July 11, 2019
  3. FactSet Research, July 26, 2019
  4. CNBC.com, July 31, 2019
  5. FactSet Research, July 31, 2019
  6. MSCI.com, July 31, 2019
  7. MSCI.com, July 31, 2019
  8. MSCI.com, July 31, 2019
  9. The Wall Street Journal, July 26, 2019
  10. The Wall Street Journal, July 5, 2019
  11. The Wall Street Journal, July 16, 2019
  12. The Wall Street Journal, July 16, 2019
  13. The Wall Street Journal, July 17, 2019
  14. The Wall Street Journal, July 23, 2019
  15. The Wall Street Journal, July 24, 2019
  16. The Wall Street Journal, July 11, 2019
  17. The Wall Street Journal, July 25, 2019
  18. The Wall Street Journal, July 10, 201

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