Weekly Market Commentary – August 19, 2019

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Volatility continued to rise last week as the markets swung sharply in both directions. Markets moved more than 1% on four days. The most impactful event was the two-year yield temporarily rising above the 10-year yield, a move that has coincided with the last seven recessions. News of a temporary reprieve on the most recent round of tariffs supported stocks.

Key Points for the Week

  • U.S. markets remained volatile as trade and economic news swung them sharply in both directions.
  • An interest rate indicator used to gauge recession risk suggested economic growth continues to slow.
  • U.S. retails sales remained robust and provided reassurance the U.S. economy remains sound.

The swings didn’t quite even out for stocks. The S&P 500 dropped 0.9%, and the global MSCI ACWI slid 1.2%. Bonds rallied further on concerns about economic growth. The Bloomberg BarCap Aggregate Bond Index rose 1%.

Manufacturing Some News

A key indicator used to gauge economic weakness suggested economic growth continues to slow. Last week, the two-year bond yield briefly moved above the 10-year yield, creating an inverted yield curve. An inverted yield curve occurs when short-term rates move above long-term rates.

Some parts of the yield curve have been inverted much of the year, but inversion between the two and 10-year bonds is considered a reliable indicator because it has warned of the last seven consecutive recessions.

News coverage of the inversion was extensive. If U.S. industrial companies could ramp up production as quickly as the news media, talk of recession would fade away. While the news media treated the news as crucial, other interest rate indicators with similar predictive records have been negative for a while.

Interest rate indicators are challenging to interpret much of the time. Some investors believe the yield curve causes the recession because it reduces the incentive for banks to lend and reduces economic growth. There may be some truth to this view, but it is more likely the yield curve indicates the potential for a recession is higher because economic growth is slowing.

Slowing economic growth is not news. The current trade disputes around the globe, including the U.S.-China negotiations and Brexit, have put pressure on global manufacturing. Europe’s economy has slowed as exports to China have stalled, and Brexit has pressured local economies.

The slowdown in Europe may have actually caused the inversion. Many European government bonds have negative interest rates, and European investors have sought the relatively higher yields in the U.S., thereby pushing yields lower.

But don’t write the economy off yet. Retail sales, an indicator of consumer strength, rose a healthy 0.7% and provided a positive counterpoint to negative news on trade and manufacturing.

While the consumer remains strong, slowing growth is the top risk we see in the market. That was as true last week as it was the week before.

Fun Story (Maybe)

Trump Interested in Buying Greenland

What do you do if someone is willing to loan you a lot of money at low rates? You try and buy something big, even huge. The U.S. government has large deficits; yet, investors are willing to lend to it at very low rates. So why not look for a big acquisition? With “varying degrees of seriousness,” President Trump has recently indicated interest in purchasing Greenland, which is 25% bigger than Alaska but home to less than 10% of its population. Greenland is controlled by Denmark and is rich in natural resources. This could be interesting.



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