August was not a good month for stocks at home or abroad as all the major indexes we follow were down for the month. Commodities took a significant hit as well based off of fears of a global economic slowdown. On the plus side the Bloomberg Barclays Aggregate Index was strong as the US Dollar Index posted a modest gain for the month.
U.S. & International Stock Index Returns
|Index August 2019 Year-to-Date|
|Dow Industrials (2.03%) 13.19%|
|S&P 500 (2.15%) 16.74%|
|S&P 400 (Midcap) (5.14%) 13.12%|
|S&P 600 (Small Cap) (5.29%) 8.73%|
|MSCI World (2.71%) 13.41%|
|MSCI EAFE (3.45%) 6.86%|
|Bloomberg Agg. Bond 9.10%|
|CRB Commodity Index (1.00%)|
|US Dollar Index 3.24%|
All data as of 08/31/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
August is not an historically strong month for the stock market so it did not come as a surprise that the indexes were lower and more volatile. The size of the selloff, on the other hand, did catch us a bit by surprise. Small and mid-sized companies were worse off than the large cap names as the S&P 400 and S&P 600 were down more than 5% each. This compares to a loss of 2.03% for the Dow Industrials and 2.15% for the S&P 500 large cap index. The MSCI EAFE (global index) dropped 3.45%.
As weak as equities were this past month the bond market matched it with its strength. The Bloomberg Barclays Aggregate Bond Index gained 2.75% in August as interest rates continued to fall. The 10-year US Treasury Yield closed the month at 1.506%. This is very close to the all-time low print of 1.36% back in 2016. At a time when most developed countries’ sovereign bonds are trading at or below 0% it comes as no surprise to us that US Treasury yields have fallen back to these levels.
Once again, the US Dollar Index increased in value, ending August at 98.86, as trade tensions remain unresolved.
The combination of global trade tensions and concerns about the economy really took a toll on the commodity index. By the end of the month the index lost 6.14%, priced at the lows set back in late-December 2018. Inside the index saw selling in both the oil complex and copper – economically sensitive areas of the market.
Gold, on the other hand, continued its breakout from a 6-year consolidation, finishing the month at $1,525 per ounce. We would not be surprised to see a pullback at some point in the next few weeks, given the speed of the move higher. If that does happen, we do not see it as cause for concern, but rather a normally occurring pullback.
In our July Market Letter we took a very cautionary approach to equity investing for two basic reasons – the weakening economic conditions at home and abroad along with the divergence of the various markets we follow from their normal patterns. In retrospect, those concerns played out as the equity markets lost value in August. Taking a step back a more interesting pattern sticks out.
If you look at the S&P 500 chart in the first section (Chart #1) you will see that even as the index was down for the month it basically stayed within a trading range. Taking one step backwards you can also see that the index was in this same range earlier in the year, taking two downward moves touching the 2725 area and one move higher to new highs just above 3025. This consolidation within a consolidation makes reading the proverbial tea leaves a straightforward process in our opinion. A significant break below the 2725 area would turn us bearish while a move up above 3025 would be seen as bullish. A move to those levels that doesn’t break out would lead us to see the consolidation as the ongoing status quo.
We do not see earnings as a driving force as current forecasts are for looking at negative growth for S&P 500 companies (source) for the third quarter, which is a continuation of the earnings trend. Instead we view outside factors like the trade war with China and the direction of interest rates to be more important factors in the near term. This last point is an important one because what happens over the next few months, and the next year, we see as two very different conversations with two very different likely outcomes.
In the coming months the direction of interest rates will likely move the markets. “The Market” has been assuming rate cuts at the Fed Governor’s Meeting is September along with another cut later this year. If this happens we expect it to be positive for markets. Slower than this scenario or no rate cut would, in our opinion, leads to lower stock prices as traders would not be receiving desired economic stimulus.
The trade war with China is similar in nature. With talks expected to start in September and a face-to-face in October, an agreement (no matter how small) we see as stock market positive. Lack of progress would likely trigger a selloff.
Over the next few months we are cautious but optimistic that positive news can continue to push equity markets higher, even in the face of flat to slightly down corporate earnings. Looking out into 2020, however, our concerns for the overall stock market grows if earnings do not rebound. But that doesn’t mean we are completely negative on equity investing.
Growth stocks have been dominating for the past decade as investors have had an appetite for higher growth companies with higher valuations. The result has been an historically wide spread in the valuations for traditional growth stocks to traditional value stocks. This is not an unusual situation, other then the extent to the length of the current cycle and the extent of the valuation spread. Trends can stay in place longer than one would logically expect.
Over the past year we have been watching small changes in the markets that we think are foretelling of a change in market leadership from the growth names to the value names. The combination of unusually high valuations for growth companies and slowing earnings growth is a big picture problem for growth companies as investors won’t pay a high price for a company that is not meeting growth expectations. In such a situation money starts to look for a new home as it flows out of these high-priced names. Value companies, now trading at very good values, tend to have slower but steadier earnings growth prospects, begins to look attractive to more investors. And so the change in leadership begins.
We enter September still cautious, but with an eye towards a possible change in the short-term direction of the stock market. Longer-term we see the stock market as a whole struggling if earnings don’t turn higher. As always, we will be watching to see what happens with the various markets we follow as well as the geopolitical background.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Magellan Financial, Inc. is a separate entity from WFAFN.
Investment and Insurance Products:
|NOT FDIC-Insured||NO Bank Guarantee||MAY Lose Value|
Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com