Market News

Monthly Economic Update: August 2019

U.S. Economy Still Growing Despite Global Turmoil

U.S.-China trade, currency dispute impacting other economies, financial markets

Out of the ashes of the global financial crisis, the U.S. economy in July entered its longest-running expansion in history. Stocks managed to eke out gains, even as markets sold off on the final day of the month, following the Federal Reserve’s decision to lower short-term interest rates.

Fed Chairman Jerome Powell called the rate cut “a mid-cycle adjustment to policy,” in the press conference following the announcement. His comments lowered expectations that the central bank was on the path toward a full-blown easing cycle.

Powell said the rate cut was aimed at “insuring” against downside risks, such as trade tensions, even as the Federal Open Market Committee still sees a favorable baseline outlook for the U.S. economy.

The trends that the Fed has been watching for much of this year – weakening global growth, trade policy disputes and emerging deflationary trends – have all come to the fore this month. In early August, President Trump announced that the U.S. would impose 10% tariffs on $300 billion of Chinese goods in September.

In response, China’s central bank didn’t defend its currency the following week. The yuan broke through the 7 yuan to the dollar level for the first time in 2008 and the People’s Bank of China has continued to set the yuan near the 7 to the dollar level in recent sessions.

Both actions have rattled financial markets now that the trade war has escalated to a new front ─ currencies. In addition, aggressive interest-rate cuts from central banks in India, New Zealand and Thailand coming a week after the Fed’s action have fueled investors’ concerns that global growth is dimming. The result for financial markets has been a flight-to-quality for safe assets like gold and government bonds. Trading activity for major U.S. stock indexes has also been volatile this month.

For an overview of where markets might be headed and a look at capital investment, global manufacturing, and market trends please see BCJ Market Insights for CIO Benjamin Bimson’s August 8 post: Economics, Trade Wars And Fed Interest Rate Policy, Oh My!

U.S. Expansion Becomes Longest Since Recordkeeping Began

With the trade war weighing on business sentiment, U.S. economic growth in the second quarter fell to 2.1% on an annualized basis. That was down from gross domestic product (GDP) growth of 3.1% in the first three months of the year.

While that was stronger than what many analysts may have been expecting, exports fell 5.2%. Weakness in Europe and the U.S. trade dispute with China were among the factors for the lower figure.

The Bureau of Economic Analysis said declining business investment and commercial and residential investment contributed to the slowdown in the pace of growth for the U.S. economy in the second quarter.1

This July marked 121 months in which the U.S. economy has been growing, the longest since records began back in 1854, according to the National Bureau of Economic Research.2

Still, this expansion has not been as strong as others in the post-war era. Cumulative gross domestic product (GDP) growth on a quarterly basis has been about 25.0%, roughly in the middle of the pack of seven post-war expansions. (This CNBC report provides charts with data from the St. Louis Federal Reserve showing economic and job growth of this expansion along with others in the post-war era.)3

It’s a similar story for employment, with job growth in the current expansion also not as strong as other post-war expansions. The unemployment rate at 3.7%, however, still remains near a 50-year low and job growth continues.

According to the Labor Department’s recent report, U.S. employers added another 164,000 jobs to payrolls in July. The total U.S. labor force at 163.4 million was a record high. Average hourly earnings rose 3.2% compared to a year ago.4

In the manufacturing sector, slowing growth in demand and consumption led to a softening in the Institute for Supply Management’s manufacturing index fell to 51.2 in July from 51.7 in June, its weakest reading since August 2016. July was the fourth straight month the index has declined.5

Though softening, the U.S. manufacturing sector is still in expansion mode in contrast to the eurozone. IHS Markit’s manufacturing index for July showed the sector contracting at the fastest rate since the end of 2012. July’s reading was also the sixth-straight month of contraction, with business sentiment also falling to its lowest level since December 2012.6

A trend to note, for now, is that U.S. consumer sentiment remains high in contrast to weakening business confidence here and abroad. (The Conference Board’s measure of consumer confidence rebounded in July to its highest level of the year.)7 The growing concern for the global economy is whether the deterioration that the manufacturing sector has experienced and the pullback of sentiment and investment ultimately spills over to the services sector.

Apart from the Federal Reserve’s expected rate cut at the end of July, the surprise actions of the three central banks in India, New Zealand and Taiwan noted above, indicate that policy makers believe stimulus is needed now to offset further fallout from the U.S.-China trade conflict.

Consumer Confidence, Low Rates Could Lift Housing

The U.S. housing market is one area where the combination of the nation’s strong labor market, falling interest rates and consumer confidence could potentially help spur more activity. While month-to-month sales data continue to be volatile, new home sales were positive in June. The much larger existing-home sales market, however, experienced another month of declining sales.

New single-family home sales rose 7.0% in June from the prior month to a seasonally adjusted annual rate of 646,000, the Census Bureau reported in late July.8 The National Association of Realtors reported that existing-home sales fell 1.7% in June compared to the previous month to a seasonally adjusted annual pace of 5.27 million.9

As has been the case in recent years, affordability and available inventory, continue to be issues for first-time home buyers and other potential homeowners. The good news is that mortgage rates have been trending lower following the Federal Reserve’s rate cut and lower yields for 10-year U.S. Treasury notes – a key benchmark for mortgage pricing.

 

 

Stocks’ Gains in July Set to Whither in August?

Technology stocks in the U.S. equity markets were again the leaders in July, helping the major market indexes to rise. The consumer staples, financials and communication services sectors also all performed well this past month. The Dow Jones Industrial Average ended July with a gain of 0.99%, while the S&P 500 rose by 1.31% and the Nasdaq gained 2.11%.

The S&P 500 information technology sector has gained 30.23% this year through July and was up 3.26% for the month. Communication services (up 21.91% year-to-date through July) rose by 3.01%, followed by the financial sector which gained 2.29% and is up by 18.58% for the year through July.

 

 

Defensive sectors didn’t perform as well. The S&P 500 energy sector fell 1.87%, though it has gained 9.06% this year through July. The health care sector fell 1.72% last month and has gained only 5.28% on the year through July – making it the worst performer of the 11 industry sectors within the S&P 500. Concerns about proposals for a universal Medicare plan from some Democratic presidential candidates has partly weighed on the sector.

In contrast to the somewhat positive performance for the major U.S. market indexes, aggregated results for stock markets in Europe and Asia were generally flat to negative. In Europe, the Stoxx 600 gained just 0.23%, losing some momentum toward the end of the month on reignited trade tensions. Japan’s Nikkei 225 rose by 1.15%. Emerging markets, as tracked by the S&P Emerging Broad Market Index (BMI) fell 1.20% in July.

Thus far in August, stock markets have been exhibiting a sharp rise in volatility. Oil prices have also declined amid concerns over global growth. Brent crude, the global benchmark, is down nearly 14.0% through August 7. Until August 8, the three major U.S. market indexes were each down by 3.20% or more.

With geopolitical risks, the trade dispute and other factors making up the current market environment, it may be prudent to have a strategy that allows for flexibility without taking huge risk and bets, as CIO Benjamin Bimson notes: “This might be a good time to remain patient, but it certainly is a good time to also examine strategy. Does your strategy satisfy you on what if can do in whatever trend emerges from this week’s actions? A review could go a long way to helping you make sure that you are in the best position you can be in!”

 

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Sources:

1-Bureau of Economic Analysis (2019, July 26). National Income and Product Accounts Gross Domestic Product, Second Quarter 2019 (Advance Estimate) and Annual Update [Press Release]. Retrieved from: https://www.bea.gov/system/files/2019-07/gdp2q19_adv_1.pdf

2-National Bureau of Economic Research. US Business Cycle Expansions and Contractions. Retrieved from: https://www.nber.org/cycles/cyclesmain.html

3-Li, Y. (2019, July 2). This is now the longest US economic expansion in history. CNBC. Retrieved from: https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html

4-Bureau of Labor Statistics. (2019, August 2). The Employment Situation — July 2019 [Press Release]. Retrieved from: https://www.bls.gov/news.release/pdf/empsit.pdf

5-Institute for Supply Management. (2019, August 1). July 2019 Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm?SSO=1

6-IHS Markit. (2019, August 1). IHS Markit Eurozone Manufacturing PMI® – final data: Manufacturing sector contracts at fastest rate since end of 2012 [Press Release]. Retrieved from: https://www.markiteconomics.com/Public/Home/PressRelease/5ea690f5df6b47c2b4789aa9d34e5e3e

7-The Conference Board. (2019, July 30). The Conference Board Consumer Confidence Index Rebounded in July [Press Release]. Retrieved from: https://www.conference-board.org/data/consumerconfidence.cfm

8-U.S. Census Bureau. (2019, July 24). Monthly New Residential Sales, June 2019 [Press Release]. Retrieved from: https://www.census.gov/construction/nrs/pdf/newressales.pdf

9-National Association of Realtors. (2019, July 23). Existing-Home Sales Falter 1.7% in June [Press Release]. Retrieved from: https://www.nar.realtor/newsroom/existing-home-sales-falter-1-7-in-june

Sources for Market Data:

Dow Jones Industrial Average:

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F19&x=41&y=27                                          

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F18&x=44&y=20                  

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F14&x=48&y=24                                          

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F09&x=21&y=22                                          

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F18&x=22&y=23                                       

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F28%2F19&x=34&y=24                                          

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F07%2F19&x=34&y=24                  

S&P 500:                                                                                                                                                                             

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F19&x=24&y=24                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F18&x=29&y=22                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F14&x=48&y=20                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F09&x=25&y=28                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=12%2F31%2F18&x=32&y=27                                         

http://bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F28%2F19&x=25&y=23                                           

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=8%2F07%2F19&x=18&y=22                                            

Nasdaq:                                                                                                                              

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=7%2F31%2F19&x=49&y=23         

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=7%2F31%2F18&x=46&y=24         

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=7%2F31%2F14&x=35&y=21         

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=7%2F31%2F09&x=20&y=20         

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=12%2F31%2F18&x=58&y=23      

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=6%2F28%2F19&x=35&y=24         

http://bigcharts.marketwatch.com/historical/default.asp?symb=NASDAQ&closeDate=8%2F07%2F19&x=37&y=17

10-Year TIPs:                                                                                                                                                                    

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2019                                                                                                                                                                                            

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2014                                                                                                                                                                                            

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2009                                                                                                                                                                    

S&P 500 Sectors:

Silverblatt, H. (2019, August 2). Market Attributes: U.S. Equities July 2019. S&P Dow Jones Indices’ Market Attributes®. Retrieved from: https://us.spindices.com/documents/commentary/market-attributes-us-equities-201907.pdf?force_download=true

Euro Stoxx 600 Index:

http://bigcharts.marketwatch.com/historical/default.asp?symb=stoxx600&closeDate=7%2F31%2F19&x=26&y=20         

http://bigcharts.marketwatch.com/historical/default.asp?symb=stoxx600&closeDate=6%2F28%2F19&x=28&y=25         

http://bigcharts.marketwatch.com/historical/default.asp?symb=stoxx600&closeDate=12%2F31%2F18&x=31&y=25       

10-Year Treasury Note:

https://www.cnbc.com/quotes/?symbol=US10Y

West Texas Intermediate Crude:

https://www.bloomberg.com/quote/CL1:COM 

Brent Crude:

https://www.bloomberg.com/quote/CO1:COM

 

Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 19-116

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