HIGHLIGHTS:
Progress on China trade talks outweighed softer economic data.
Slower global growth may have reached our shores.
Week Ahead: Congress is back in session.The ECB will discuss new monetary stimulus measures.We will get updates on inflation, retail sales and small business confidence.
Progress on China trade talks outweighed softer economic data.
Progress in resuming trade talks with China outweighed signs of a slowing domestic economy in the latest week lifting the S&P 500 nearly 2%. The index closed above its 50-day and 200-day moving averages suggesting improved market momentum and closed less than 2% away from the record high hit in late July. We remain cautiously positive on the outlook for the U.S. economy and the equity markets but readily admit that we are always just a tweet away from renewed volatility.
Slower global growth may have reached our shores.
The slowing pace of global economic growth may be washing up on domestic shores due to the cumulative effects of tariffs, Brexit and other uncertainties. The slowing potentially hampers future corporate sales growth and dampens profit margins-both of which are a headwind to company earnings growth. The latest evidence came from the decline in the ISM Manufacturing survey of corporate purchasing managers which fell below 50 in August. A reading above 50 indicates expansion, while a reading below 50 points to contraction. Other measures of manufacturing activity are more positive, but all data point to a measurable slowing in manufacturing activity.
Anecdotal evidence suggests the ongoing trade dispute with China is a major source of uncertainty for companies that either sell to China or use Chinese goods in their supply chain. As we understand it, the goal of the aggressive trade negotiations with China is to “level the playing field,” which Via Nova and most businesses support. That said, we also observe the efforts to level the playing field appear to have pushed many “players” (i.e. businesses) to the sidelines, delaying new investment and slowing growth. It is hard for CEOs to develop a game plan or business strategy when they don’t know the ultimate shape and condition of the field. Many companies have already announced plans to shift production away from China as the trade talks drag on. We believe that failure to come to come reasonable trade agreement could accelerate the shift away from China to other countries including India, Vietnam and Indonesia. Ultimately, businesses will adapt and adjust to the vagaries of the trade dispute, but the process can be long and difficult. On-again off-again trade talks only extend the period of uncertainty.
The other major bit of economic data came from the August jobs report, which showed a continued low unemployment rate but a smaller than expected job gain. Job growth is strong enough to absorb the expected new labor force entrants and keep the unemployment rate at near 50-year lows, but the pace of job creation has slowed in recent months. Job growth means more people earning more money and buying more things. Despite the smaller than expected gain, there were several encouraging elements to the report. First, average hourly earnings rose more than expected and increased 3.2% over the past year. Also, average hours worked inched higher. Finally, there was a surge in the number of people entering the labor force, a signal that more people believe there may be an available job. The net of all this data is that the economy remains in the current record expansion, but that the effects of slower global growth and continued trade tensions with China are having a negative effect. The continued strength of the consumer along with expectations of a rate cut by the Fed at the next Federal Open Market Committee (FOMC) meeting should help support further gains in GDP.