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Weekly Market Update — September 2, 2019

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MARKETS END AUGUST ON A POSITIVE NOTE AS CONSUMER SPENDING COMES IN HIGHER AND CONSUMER SENTIMENT DECLINES

  • The major U.S. markets snapped their four–week losing streak as trade challenges with China cooled off, at least relative two men talking on the trading floorto the past couple of weeks
  • The narrowly–defined, mega–cap DJIA led the way with a weekly return of 3.0%, followed by the large–cap, diversified S&P 500’s increase of 2.8%, then the tech–laden NASDAQ’s gain of 2.7% and the smaller–cap Russell 2000 Index’s move of up 2.4%
  • Every one of the 11 S&P 500 sectors finished up this week, with Industrials leading the way with a 3.6% gain and the defensive–oriented Utilities sector bringing up the rear with a gain of 1.8%
  • The week’s economic data gave the markets a shot in the arm, as consumer spending came in much better than expected and the previous month’s numbers were revised upward
  • Consumer sentiment, on the other hand, was down, mostly due to escalating trade rhetoric with China
  • The U.S. Treasury market was less volatile this week, but yields continued their downward trend
  • The 2–yr yield declined to 1.50% and the 10–yr yield dropped to 1.50% as well
  • The U.S. Dollar Index advanced 1.2% to 98.81
  • WTI crude rose 1.7% on the week and ended just north of $55/barrel

Weekly Market Performance

Chart of Weekly Market Performance

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The Month of August was Volatile

Friday brought an end to the month of August, which saw volatility increase significantly due to the noise between the U.S. and China.

The major U.S. equity indices are still in very positive territory year–to–date, with NASDAQ leading the way with a 20% YTD gain. The S&P 500 is up 16.7% so far this year, but it is off about 3.5% from its recent high and pretty close to where it was a year ago. But thankfully, stocks finished the last week in August in the green, which also snapped the streak where it was painted red for four weeks in a row.

Without question, the market news that dominated the month of August was China, as trade tensions and tariff threats increased throughout August, but softened a bit in the final week.

While there does not appear to be an agreement in sight near term, most market economists believe that a settlement will be reached. Indeed, this week’s comments from both camps suggest that positions are softening and talks will resume soon.

Consumer Spending is 2/3 of GDP

Consumer spending came in this week much higher than expected with a 4.7% annualized growth number, the highest gain in 4 years.

Strong consumer numbers also showed up in the earnings of consumer–oriented public companies – Walmart, Home Depot and Lowes among them.

Strong consumer numbers are also driven by low unemployment numbers, which show the U.S. near a 50–year low in unemployment in addition to rising wages.

From the Department of Commerce:

  • Personal income increased $83.6 billion (0.4 percent) in June
  • Disposable personal income (DPI) increased $69.7 billion (0.4 percent) and personal consumption expenditures (PCE) increased $41.0 billion (0.3 percent)
  • Real DPI increased 0.3 percent in June and Real PCE increased 0.2 percent
  • The PCE price index increased 0.1 percent
  • Excluding food and energy, the PCE price index increased 0.2 percent
  • The increase in personal income in June primarily reflected increases in wages and salaries, government social benefits to persons, and supplements to wages and salaries

Consumer Sentiment Drops

While consumers were spending during the second quarter, they were feeling less and less positive about where the economy was heading based on the Consumer Sentiment Index published by the University of Michigan.

From the release:

“The Consumer Sentiment Index posted its largest monthly decline in August 2019 (–8.6 points) since December 2012 (–9.8 points). The 2012 plunge reflected widespread fears of being pushed off the “fiscal cliff” due to rising taxes and falling government spending. The recent decline is due to negative references to tariffs, which were spontaneously mentioned by one–in–three consumers. Unlike concerns about the fiscal cliff, which were promptly resolved, Trump’s tariff policies have been subject to repeated reversals amid threats of higher future tariffs. Such tactics may have some merit in negotiations with China, but they act to increase uncertainty and diminish consumer spending at home. Unlike the repeated tariff reversals, negative trends in consumer sentiment cannot be easily reversed.

The data indicate that the erosion of consumer confidence due to tariff policies is now well underway. Compared with those who did not reference tariffs, consumers who made spontaneous negative references to tariffs also voiced higher year–ahead inflation expectations, more frequently expected rising unemployment, and expected smaller annual gains in household incomes. While the overall level of sentiment is still consistent with modest gains in consumption, the data nonetheless increased the likelihood that consumers could be pushed off the “tariff cliff” in the months ahead.”

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Sources
commerce.govbea.govsca.isr.umich.edu; factset.comstandardandpoors.comnyse.comsec.gov;
federalreserve.govmsci.comnasdaq.comdowjones.commorningstar.comedwardjones.com;
bloomberg.com




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