September 11 remembered

Last year, at this time, markets were on the precipice of a meltdown that lasted into year-end, 2018. December 24, to be exact. Fueling the dramatic shift to risk aversion in investor sentiment were themes familiar to today’s investing landscape: fear of a pending recession, concern over the trade tensions with China, and lack of certainty over the Fed’s flight path in regards to monetary policy. This year, as was the case last year, US equity indices were trading near all-time highs and investor sentiment was riding high–until it suddenly wasn’t.

Though there remain hurdles for the market that are similar to what was pervasive last year at this time, there are also significant differences.


For example, the Fed has shifted from tightening to loosening incrementally. The Fed’s move to raise last December was the last in this cycle and was followed by an equally modest cut in rates in 2019. The net change in rates managed by the Fed is unchanged from December of 2018 to today.

Last Friday, speaking in Zürich, Fed Chair Powell executed on a two-fold mission. A mission that assured investors that the Fed was positioned to help offset economic weakness in the US economy, should it materialize, while at the same time assuring investors that the Fed did not see any signs of a recession at this point. He gave a nod to those looking for lower rates while effectively making the case that the economic expansion was still healthy enough to hold off on any move for the time being.

Fed Chair Powell did however also leave the door open to variables facing the market and the fragile state of the global economy. Chair Powell made it clear that the Fed is closely watching factors that could upend our on-going expansion – specifically the on-going US/China trade challenges. To a degree, that narrative has also changed from last year at this time though we are a long way off from any trade deal.

For one thing, the trade tariffs imposed by the Trump administration on Chinese imports have not ignited inflation as has been evidenced by CPI among other readings. They have also seemingly brought China back to the table for high level trade talks for the first time in months. Not coincidently just as President Trump has raised the stakes by adding more tariffs this month while announcing support for the agriculture sectors through additional ag-centric trade deals and financial programs aimed at softening the blow of reduced demand as a result of China’s reduction of American ag-imports.

US/China trade will remain a pivotal narrative for investors moving forward. That said, the simple fact that both countries have announced a resumption in trade talks has helped alleviate some of the apprehension that has been evidenced by the choppy trade that defined August.

In the media this week:

GLOBAL MARKETS-Stocks give up early gains, pound hits 6-week high
By Chuck Mikolajczak
ReutersSeptember 9, 2019

The European Central Bank is expected to introduce new stimulus measures at its meeting on Thursday. “To what extent is even a highly coordinated effort to reduce the cost of capital, how is that going to affect the global economy?” said Peter Kenny, Founder, Kenny’s Commentary LLC and Strategic Board Solutions LLC in New York. “There is a degree of skepticism that this time around it will have the same sort of therapeutic effect on triggering appetite.” Full article on Yahoo Finance

Economic Calendar Highlights Last Week and their Impact on the Market:

For the first time in three years the ISM Mfg. Index dropped below 50% in August. This data point was used to underscore the thesis that the US economy was beginning to feel the effect of trade tensions and tariffs with China. It came in at 49.1 versus Econoday consensus of 51.3 and July’s reading of 51.2. US equity market posted a decline on the day in large part as a result of the drop. Volume ticked higher.

The U.S trade deficit (goods and services) narrowed in July to $-54.0B from June’s revised $-55.5 B. That narrowing was greeted with muted cheers as markets posted modest gains on a downtick in volume.

The ADP Employment Report for August was released at 8:15 am. The report reflected continued strength on the employment front. 195k private payrolls were added in August – according to ADP’s initial report. Econoday consensus was calling for a more modest gain of 150k. July’s monthly totals were revised lower to 142k from the initial reading of 156k. Though the ADP report for August did provide a counter to the trade induced recession narrative that has consumed talking heads, it wasn’t the only reason market leaped on Thursday. It was news that US/China trade talks were scheduled to resume next month. Those factors in combination fueled a meaningful reversal for US equities. On the session, the Dow gained nearly 400 points and volume finally punched higher – eclipsing it’s trailing 50-day moving average.

All three major US equity indices closed above their respective 50 DMA on expanding volume for the first time since mid-July. Given the support provided by the 200 DMA after repeated tests in August, and the follow-through reversal on Thursday, markets appear to have dodged a bullet. That bullet was my call for a trade-off 10% by quarter-end. It may still happen – there is plenty of time left before the end of the month for “risk-off” to re-emerge. That said, my thesis was predicated primarily on continued stalled trade talks, which are no longer stalled.

Fed Chair Powell’s talk in Zürich is covered in the introduction. It did not fuel additional “risk-on” in the market, but importantly it did not trigger any meaningful “risk-off” either. Investors appear to have reset their expectations for trade and monetary policy. The monthly employment report for August was released on Friday. There are a couple of ways of looking at this report. The topline results left many underwhelmed. For the month, non-farm employment gains totaled 130k versus Econoday consensus of 163k. Additionally, July’s gains were revised lower to 159k from the initial reading of 164k. The unemployment rate remained steady and at cycle lows at 3.7%. The fact that the non-farm payrolls have begun to slip versus consensus in combination with the unemployment rate leveling off is very likely a result of the economy performing at full employment. That thesis is given additional validation by the Labor Force Participation Rate (LFPR). In the August report, the LFPR climbed to 63.2% from July’s 63%. Increasingly this economic expansion is pulling workers, that were unemployed long term, back into the workforce. Another very important data point in the employment report comes in average hourly earnings. In August they rose by 0.4%. On a Y/Y basis, average hourly earnings have risen 3.2%. In short, the top-line gains were below forecast but the data within the report speaks to a healthy employment picture with wage gains outpacing inflation.

Flickr photo: https: Glyn Lowe Photoworks

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