U.S-based stock market indexes rebounded in September posting solid gains. Globally, trade tensions and economic growth concerns continued to weigh down equities as the MSCI EAFA continued its downtrend. Bonds were down slightly, as was the US Dollar. The CRB Commodities Index had its strongest month in some time.
U.S. & International Stock Index Returns
|Index September 2019 Year-to-Date|
|Dow Industrials 2.20% 15.39%|
|S&P 500 2.00% 18.74%|
|S&P 400 (Midcap) 3.26% 16.38%|
|S&P 600 (Small Cap) 3.45% 8.73%|
|MSCI World 2.31% 15.72%|
|MSCI EAFE (3.21%) 3.65%|
|Bloomberg Agg. Bond 8.52%|
|CRB Commodity Index 2.44%|
|US Dollar Index 3.37%|
All data as of 10/01/2019, 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.]
Just because a month is historically weak doesn’t mean that it will be every year. Case in point: equity indices were across-the-board higher in September. The S&P 500 gained 2.00%, moving back above the 50-day moving average, as did the S&P 400 ($MID), S&P 600 ($SML) and Dow Jones Industrial Average ($DJIA). The big question in October is, can the trend higher hold?
In the short-term we have our doubts. The move higher has been important but has not been a strong move to higher levels. Instead the move higher did not (at least so far) bring the indexes to new higher levels. And frankly, the economic news has not been great. Economic growth has been tepid with third quarter growth expected to be 1.8%; Corporate earnings continue to be positive but slowing; US-based manufacturing has been negative due heavily to the ongoing trade dispute with China.
The downtrend in bond yields continued in September as the 10-year Treasury pushed higher, but failed to sustain at higher (but not high) levels, closing the month at 1.675%. The Bloomberg Barclays Aggregate Bond was negative for the month, posting a loss of 0.58%. Overall bonds have performed incredibly well for 2019 as the index is +8.52% for the year. We would not be surprised to see the September lows tested in the near future.
Once again, the US Dollar Index continues to trend higher, posting a gain of 0.13% for the month. Unresolved trade tensions will continue to keep the dollar high, if not push it higher. An orderly move higher for the US Dollar Index back to the 2016 highs around 103 in the coming months would not surprise us as we do not see an end for the Chinese trade tensions in the short to intermediate term.
Oh the difference a month can make. Last month we were talking about how economic weakness was having a negative effect of the commodities index. This month we have the index up more than 3%, bouncing off the 168 support level. We believe the vicious move higher had more to do with an attack on Saudi Arabian oil fields than anything else. Once the world realized the damage wasn’t going to disrupt the oil markets oil prices began to trade lower.
Gold (Chart #5) has pulled back after posting very strong gains since breaking out of a 6+ year consolidation. The pullback has been orderly. We see 1452, 1417 and 1382 as levels of support. Below those levels our bullishness on the yellow metal would likely change.
It is an interesting phenomenon that we traditionally think about stock market gains on a calendar year basis and rarely take a look at it from different points in time, or different lengths of time beyond the typical 1-year, 3-year, 5-year and 10-year numbers. Doing so can give a different perspective on the markets. We bring this up because in 2019 the stock market looks really good with all the major US stock indices up more than 15%, with the exception of the S&P400 which is up a very respectable 8.73%. Sounds really impressive … and it is.
However, when we take a look at where the market has gone over the past 12 months a different picture is painted. Between October 1, 2018 and September 30, 2019, the S&P 500 was down about 1%, the NASDAQ down about 3%, and the small cap S&P 600 was down more than 12%. When looked at from this perspective it is plain to see that there may be a different story to tell about the stock market and the economy.
Since April 2018 the United States has been in an escalating trade dispute with China, one of our largest trading partners. While there are other factors, the trade dispute with China has become a negative for economic growth both at home and abroad. Economic growth hasn’t turned negative, but it has slowed substantially. The latest third quarter GDP estimates is 1.8%, down from 2.9% growth for all of 2019.
US Manufacturing has been contracting with the ISM manufacturing purchasing managers’ index at its lowers level since June 2009. New job growth has been slowing – In 2019 the United States has averaged 158,000 new jobs per month, down from the 223,000 produced monthly in 2018. In September that number was 130,000. And while the consumer remains strong, auto sales have been slowing as well.
What makes these numbers important is that we know two things usually happen before a recession – employers stop hiring (even as the unemployment rate remains low) and corporate capital spending turns negative. Recessions are important to investors as they cause corporate earnings to contract and stock prices fall.
October is traditionally a volatile month for equity investors. And we are concerned with what’s going to happen in the next 31 days. But we are more concerned with the longer-term. New job hiring and capital spending – the drivers of GDP growth, corporate earnings, and higher stock prices – won’t turn around without an end to the trade dispute. A UBS survey of business owners showed the trade war is impacting growth plans. We know that manufacturing has contracted. In our opinion, no resolution to the trade war results in a best-case scenario of slow growth, a recession at worst. In either circumstance earnings growth slows, which has a negative effect on stock prices.
It is our concerns with the negative effects of the trade war with China that leads us to continue to be cautious. The longer we go without a resolution the more worried we get. As always, we will be watching to see what happens with the various markets we follow as well as the geopolitical background.
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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
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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