Volatile Month For Stocks – Equity Overview

Despite the volatility in August, all eleven sectors of the S&P 500 were still positive year-to-date as of Aug 30th, with the technology, real estate, and consumer discretionary sectors leading.

Earnings moved to the forefront of concerns for equities as the effect of Fed rate cuts dissipated with fewer future cuts expected. Global growth headwinds along with international debt issues contributed to market uncertainty.

Equity analysts are following three primary market risks influencing U.S. stock prices: effects of trade tensions; slide in earnings estimates; and fewer Fed rate cuts than previously anticipated. (Sources: S&P, Bloomberg)

Bond Yields Continue To Decline – Fixed Income Update

Bond prices continued to rise in August, causing bond yields across most sectors to fall. The bond market has been the primary indicator of recessionary threats for decades, when short-term bond yields rise above longer term bond yields. Long-term bonds have been among one of the best performing asset classes year-to-date alongside equities, a pairing that is an anomaly in financial markets.

The yield on the 10-year Treasury bond fell to 1.50% in August, its largest monthly yield drop since 2011. The yield on the 30-year Treasury bond fell below 2% in August, fueling expectations of dismal economic long-term growth.

The U.S. Treasury is considering the first-ever issuance of 100-year U.S. Treasury bonds in order to take advantage of the current ultra-low rate environment. Other countries have already used long-dated debt to take advantage of the global low-rate environment, with Austria, Belgium, and Ireland issuing century bonds over the past few years. (Sources: Treasury Department, Eurostat, Bloomberg)

What The New Tariffs Will Affect – Trade Policy Review

Although tariffs are assessed on a wholesale level, most manufacturers are passing along new tariffs to consumers in the form of higher prices. Unlike prior tariffs applied to Chinese imports earlier in the year on unfinished materials and products, such as aluminum and components used for manufacturing purposes, the tariffs effective Sept 1st will impact mostly finished consumer products.

The tariffs will apply to products from clothing and shoes to furniture and computers. Sneakers, sweaters, pants, dresses, and baby clothes all fall under a category worth roughly $39 billion in annual imports from China. Higher priced items such as furniture products including chairs and sofas are worth roughly $1 billion in annual imports.

The new tariffs may not result in immediate price hikes at stores, as some retailers have stockpiled inventories of products with no assessed tariffs because they were imported before September 1st. (Sources: U.S. Department of Commerce)

U.S. Recessions – Historical Note

Historians and economists identify 47 recessions in the United States dating back to the Articles of Confederation, which was ratified in 1781. The duration and intensity of each recession has been unique, with various factors affecting economic conditions contingent on current circumstances.

Interestingly, the recession during the early 80s from 1980 through 1982 was driven by inflation and rising interest rates which created an expensive and restrictive environment for consumers and businesses. Conversely, economists currently view any probable recession as being driven by an ultra-low-rate environment and minimal inflation, believed to be a result of excessive stimulus created by the Federal Reserve and dismal economic growth projections.

Modern recessions occurring in the 19th century have resulted from financial crises and market-driven events, while recessions that occurred in the 1800s were primarily driven by war and the weather due to economic dependence on agriculture.

Low interest rates and weakening economic indicators support an argument for a recessionary environment. Economists and analysts view recessions as a component of an economic cycle driven by expansions and contractions. (Source: Federal Reserve; fred.stlouisfed.org/series/JHDUSRGDPBR)

U.S. Treasuries Remain Attractive – Global Fixed Income Overview

Even as the 10-year Treasury yield fell below 1.5% in August, it is still offering a much more attractive yield than most other developed country government bonds. Yields for 10-year government bonds in Germany and Japan yielded -0.69% and -0.27%, respectively. Such negative yields mean that investors are basically paying the governments of Germany and Japan to hold onto their funds. International investors not only pursue the best yields possible, they also seek the safest debt for any given yield. The U.S. continues to offer the most transparent and liquid debt worldwide of any country or company. U.S. Treasury bonds are also held for trading purposes and for currency control. If too many bonds are bought, then lower rates may weaken the currency, a trade strategy utilized by countries to stabilize or alter exports. Developed countries whose 10-year government bond yields were below 0% as of the end of August include France, Germany and Japan. (Sources: Bloomberg, U.S. Treasury)