ND&S Weekly Commentary 9.3.19 – Equities Rally Into September

September 3, 2019

Global equities snapped a four week losing streak to end the month on a high note. Cooling trade tensions and better-than-expected economic data were the catalysts last week, but much of the core concerns regarding trade still remain. According to comments from the Chinese commerce ministry, the talks between the US and China will continue in Washington in September. The rhetoric has been toned down with China vowing not to retaliate on the latest tariff hike.

The Dow Jones Industrial Average (DJIA) jumped 3.1%, while the S&P 500 climbed 2.8% and the NASDAQ rose 2.7% on the week. International equities were also positive with the MSCI EAFE and MSCI EM finishing up 0.9% and 1.2%, respectively. The 10Yr and 2Yr US Treasuries inverted again last week, and both closed the week at yields of 1.50%. Oil continues to trade in the mid-$50 per barrel range as lower supply due to geopolitics has so far offset economic concerns and weaker demand.

Economic data on the week was generally positive versus expectations. On Monday, manufactured durable goods advanced 2.1% in July which beat expectations. On Thursday, real GDP, which adjusts for inflation, increased 2.0% in the second quarter. This follows a 3.1% advance in the first quarter of the year. On Friday, it was reported that personal consumption expenditures increased 0.6% in July, which was an increase from the previous two months. It is important to remember, consumption makes up roughly 70% of the US economy.

Earnings reports for the second quarter are mostly complete. Many analysts and forecasters were calling for an earnings decline as recently as 2 months ago. However, earnings growth for the quarter slowed to 4.9% (well ahead of estimates) from a robust 20% pace seen in 2018. On the surface it is concerning, but last year’s jump was mostly attributed to the Tax Cuts and Jobs Act which lowered the corporate tax rate from 35% to 21%. For the quarter, roughly 75% of companies reported a positive earnings surprise. On the top line, revenue has increased 3.6% versus expectations of a 3.16% increase.

We expect markets to remain volatile until more certainty regarding trade is established. We suggest investors stay close to their long-term target asset allocations with a slight defensive bias.

“The world of ours … must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect.”Dwight D. Eisenhower