Weekly Market Update for September 23, 2019

Market Thoughts for September 2019
September 1, 2019
Presented by Rich Tegge

General market news

  • Last week, the Federal Reserve (Fed) cut rates by 25 basis points (bps), bringing the lower rate target to 1.75 percent. The 10-year Treasury opened early Monday at 1.69 percent after posting its highest rates since the end of July at 1.90 percent. The 2-year Treasury touched 1.80 percent and opened at 1.66 percent on Monday. The 30-year Treasury, which had been as high as 2.37 percent, opened at 2.13 percent.
  • A tick up in trade tensions and some uncertainty in the Fed’s future rate path led markets modestly lower.
  • On Friday, trade tensions increased when Chinese officials cancelled their visit to U.S. farms. This decision came following remarks from President Trump that he does not want an interim trade deal and does not think a trade deal needs to be reached before the 2020 election.
  • The top-performing sectors were the more defensive and bond proxy sectors in health care, utilities, and real estate. The worst performers were the more growth and cyclical sectors, such as consumer discretionary, technology, and industrials. Despite the sell-off in technology, Microsoft (MSFT) was the top contributor to the index last week, up 1.54 percent as it authorized an additional $40 billion in share buybacks and increased its quarterly dividend by 5 cents.
  • Netflix (NFLX) was among the top detractors on the week, down by 7.96 percent. CEO Reed Hastings admitting to Variety magazine that “while we’ve been competing with many people in the last decade, it’s a whole new world starting in November.” He was referring to streaming services Disney+ and Apple TV+, which are both due out in November.
  • The week began with Tuesday’s release of the August industrial production report, which showed faster-than-expected growth. Headline production grew by 0.6 percent against expectations for 0.2 percent growth. This outsized growth during the month was due in large part to a rebound in manufacturing output, which grew by 0.5 percent during the month. This result should help calm fears of a sustained downturn in manufacturing output following the recent decline in manufacturing confidence.
  • Also on Tuesday, the National Association of Home Builders Housing Market Index was released. Home builder confidence increased by more than expected. It went from 66 in August to 68 in September, against expectations for a more modest increase to 67. This result marks the highest level of home builder confidence in 11 months, as low interest rates and strong home buyer demand continue to support builders.
  • On Wednesday, this increased confidence was put to the test, as August’s building permits and housing starts reports were released. Both came in much better than expected. Starts increased an impressive 12.3 percent during the month against expectations for 5 percent growth. New home supply remains constrained in key markets, so this uptick in development is good news for the housing market.
  • The Federal Open Market Committee (FOMC) met last Tuesday and Wednesday for its regularly scheduled rate setting meeting. On Wednesday, the FOMC rate decision was released, revealing that the FOMC lowered the upper bound of the federal funds rate from 2.25 percent to 2 percent. This rate cut was presented by Fed Chairman Jerome Powell as a hedge for the U.S. economy against slowing global trade. Voting members of the FOMC were uncharacteristically split, with a final tally of seven FOMC participants supporting the cut and three voting against the action. This public disagreement indicates that future rate cuts this year are not guaranteed, despite market expectations for a further cut in December.
  • We finished out the week with the release of August’s existing home sales report. Sales rose by 1.3 percent during the month, against expectations for a 0.7 percent decline. This result marks the second straight month of growth in existing home sales and, perhaps even more important, the second straight month of year-over-year growth in existing home sales. This growth is notable, as we had previously experienced 17 straight months of year-over-year declines in existing home sales until July’s results broke the trend. This continued growth, combined with increasing home builder sentiment and building activity, indicates that the housing sector may finally be turning around after a couple of disappointing years.
Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 –0.49% 2.36% 21.13% 4.19%
Nasdaq Composite –0.71% 2.01% 23.32% 2.24%
DJIA –1.04% 2.12% 17.58% 3.50%
MSCI EAFE –0.35% 3.92% 14.44% –0.05%
MSCI Emerging Markets –0.45% 3.92% 8.28% 1.43%
Russell 2000 –1.14% 4.44% 16.81% –8.01%

Source: Bloomberg

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market –0.95% 8.07% 10.11%
U.S. Treasury –1.40% 7.11% 10.06%
U.S. Mortgages –0.10% 5.42% 7.91%
Municipal Bond –1.10% 6.43% 8.41%

Source: MorningstarDirect

What to Look Forward To

We’ll start the week with Tuesday’s release of the Conference Board Consumer Confidence Index. It is set to decline from 135.1 in August to 133 in September. A spike in gas prices midmonth due to the disruption of Saudi Arabian oil production is expected to weigh on consumer confidence. Despite the anticipated decline for the index, confidence remains near post-recession highs, as equity markets have recovered from August’s volatility nicely and the job market remains healthy. High confidence levels support continued consumer spending, so this will be an important update to monitor for any weakness.

On Wednesday, August’s new home sales report will be released. New home sales are forecast to increase by 3.3 percent in August, following a 12.8 percent decline in July. Historically, new home sales have been much more volatile than existing home sales, as new homes make up a much smaller portion of the market. A rebound in new home sales following July’s decline would be welcome and unsurprising given the better-than-expected housing data we’ve already seen in August.

On Friday, August’s personal income and personal spending reports are set to be released. Economists expect income to rise by 0.4 percent during the month. Spending is set to grow by 0.3 percent, following a 0.6 percent increase in July. Consumer spending has been the major driver of economic growth for much of the year, so continued strength in August’s income and spending figures would bode well for overall third-quarter growth.

Also on Friday, August’s durable goods orders report is set to be released. Here, economists expect a 1.2 percent decline in August, following a 2 percent increase in July. While the projected headline decline is disappointing, it would be due in large part to an expected drop-off in aircraft orders following the continued grounding of the Boeing 737 MAX. The core durable goods figure, which strips out the impact of volatile transportation orders, is set to increase by 0.2 percent.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

 

Rich Tegge is a financial advisor located at Wealth Strategy Group 300 S. Front Street Ste C, Marquette MI  49855. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 906-228-3696 or at rtegge@wsginvest.com.
Authored by the Investment Research team at Commonwealth Financial Network. © 2018 Commonwealth Financial Network ®