Weekly Commentary 10.7.19 – Fight to Zero

October 7, 2019

For the third straight week, the Dow Jones Industrials (DJIA) and S&P 500 declined. Investors and traders created a volatile week as dismal manufacturing data, disappearing trading commissions, and new tariffs on the European Union were announced. The DJIA lost 0.9%, the S&P 500 declined 0.3%, while the NASDAQ Composite rose 0.6%. The strength of the US dollar, worsening trade tariff issues, and weakening global economic growth hit developed international equities (MSCI EAFE), which declined 2.2%. Emerging market equities were down 0.5%. After sliding in the beginning of the week, financial markets rebounded on Thursday and Friday as sluggish employment data was released renewing confidence that the Federal Reserve would maintain their dovish stance and lower rates.
So far, global central banks have been more than accommodative with their monetary policies. There have been 33 interest-rate cuts by global central banks over the last three months. The dovish and accommodative global monetary policies should help lessen further economic declines and cushion the downside of financial asset prices.
The U.S. employment report on Friday showed that there were 136,000 jobs added in September, just slightly below the 150,000 consensus. The good news was that the jobless rate declined from 3.7% in August to 3.5%, the lowest rate in 50 years.

Investors should not get overly concerned about the media’s announced claims and counter-claims regarding the impeachment inquiries of President Trump. There have only been two presidents impeached by the House of Representatives, Andrew Johnson in 1868 and Bill Clinton in 1998. Both were not convicted by the Senate and allowed to remain in office.

We should remember that one year ago the 10-year US Treasury yield was above 3%. Last week, it declined 15 basis points to 1.53%, a result of the concern of a slowing economy. Interest rates are expected to remain low and possibly be further reduced by Federal Reserve dovish policy later this year.

We recommend that investors remain diversified, retaining a portfolio of safe, low duration bonds, a slightly higher cash position, and quality equities. We will be closely watching the upcoming earnings season and would be enticed to add to stocks with a bias toward dividends on short-term weakness. Please keep in mind that 60% of stocks in the S&P 500 index have a dividend yield higher than the 10-year US Treasury. Also, for most investors the federal income tax rate on qualified dividends is 15% and no higher than 20%. Dividends matter!

There will be important inflation data released this week: the Producer Price Index (PPI) on Tuesday and the Consumer Price Index (CPI) on Thursday. Also, the Federal Open Market Committee will release their minutes from its September meeting on Wednesday.

“People who succeed in the stock market also accept periodic losses, setbacks and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch