Another rough August week.

Market Update 081619.png


  • August is typically a challenging month for stocks.

  • Troubling news from multiple fronts…

  • …but good news here on the consumer.

  • Stocks off for the third consecutive week.

  • Via Nova sees only limited risks of a recession.

  • Week Ahead: U.S./China trade, economic reports, and Powell’s Jackson Hole address.

August is typically a challenging month for stocks.

August is typically a challenging month for the equity markets, and this year is proving to be no exception.  With many finishing summer vacations, trading volume tends to be lighter and subject to wider swings on any unexpected news.  This month the markets have been even more volatile than usual as evidenced by 1% or more daily moves in the S&P 500 in the past 13 sessions.  While we expected the increased volatility, it is still disquieting to witness in real time.  This trading pattern was not always the case.  From 1901-1950, when agriculture represented a much larger share of the economy, August was the best performing month for equities because it was harvest time.  The takeaway is that economies evolve over time which can affect stock market seasonality.

Troubling news from multiple fronts…

Markets struggled for the third consecutive week being buffeted by alternating good news and bad news on the economy and trade.  China allowed its currency to weaken to offset impending U.S. tariffs which caused many investors to shift to more defensive investments such as bonds.  Adding to the concerns were reports of negative second quarter GDP growth in Germany, the largest economy in the EU and a major exporter.   Protests in Hong Kong turned violent and threatened to escalate.  Also, the unexpected primary election loss by pro-business Argentinian President Macri by a populist opponent threatened to undo much of the economic progress in recent years.

The impact of these developments helped push down long term yields dramatically such that, for a brief period Wednesday, the yield on the 10-year Treasury dipped slightly below the yield on the 2-year Treasury.  While modest and only temporary, the move was technically a yield curve inversion, which historically signals a recession in the next one to two years.  The inversion prompted automated selling by computer-based programs and added to market volatility.  However, the inversion was short-lived and by the end of the week, the 10-year / 2-year spread was back in positive territory.  We believe the Federal Reserve will continue reducing short term interest rates this year, that the yield curve will remain positive, and that a recession is not around the corner.

…but good news here on the consumer.

On the positive side, consumer spending has strengthened, supported by healthy job and income growth, a historically low unemployment rate and falling interest rates.  In July, retail sales rose more than expected and the subset of retail spending that feeds into the GDP calculation increased at an impressive 10% annual rate over the past three months.  Indeed, reflecting that strength, Walmart announced quarterly sales and earnings that easily beat expectations.  Additionally, the decline in mortgage rates helped lift single family housing starts last month, and mortgage refinance applications surged over 35% in the latest weekly report.  With consumer spending representing 70% of the U.S. economy, estimates of third quarter growth have increased, despite softness in business investment spending that can be traced to uncertainty about trade and supply chains.

More positive news has been the decision by key central banks to announce plans to increase monetary stimulus and rumors that Germany will issue more debt to stimulate the economy.  China also announced plans to expand lending to the private sector, which could help offset the slowdown in the world’s second largest economy.

Stocks off for the third consecutive week.

When the dust settled, the S&P 500 fell 1% in the latest week and is off 3% since the beginning of the month.  The more defensive utility and consumer staples sectors were the only areas to post gains.  Small cap, international and emerging market stocks continue to underperform the large cap S&P 500.  The more defensive tone to the markets pushed interest rates to new lows and lifted the Merrill Lynch U.S. Broad Market Index by 1%.

Via Nova sees only limited risks of a recession.

Via Nova believes the economic fundamentals in the U.S. are positive, especially for the consumer, so that the risk of recession remains low.  Moreover, economic imbalances that historically lead to corrections, such as excess inventories, are notably absent in the current environment.  Government stimulus has increased, and the Federal Reserve began lowering interest rates.  On balance, we see little evidence that the equity bull market that began in 2009 has ended, but we do expect continued volatility for perhaps another couple of months.

Week Ahead: U.S./China trade, economic reports, and Powell’s Jackson Hole address.

Investors will be watching for signs that U.S./China trade negotiations are back on track.  Face-to-face talks would be a positive sign that both sides are walking back recent rhetoric.  On the economic front, we will get an update on home sales and manufacturing activity as well as the minutes from the latest Federal Open Market Committee (FOMC) meeting where they announced the quarter-point rate cut.  From a policy perspective, Federal Reserve Chairman Jay Powell will speak to the Jackson Hole Economic Symposium on Friday.  While Powell is unlikely to announce specific policy actions, his perspective on the strengths and risks facing the U.S. and global economies could be very instructive in anticipating future moves.