- On September 6, 2019
- commentary, economics, Economy, in the news, investment, Investments
Cornerstone’s Week on Wall Street
Highlights for the week:
- • Markets rebounded sharply last week as trade fears subsided
- • Volatility may likely remain elevated into year-end
- • Forward-looking economic indicators are worsening
Markets roared back last week on the back of softening rhetoric on trade with China, and news of a September in-person meeting between the delegations. Markets latched on to the news even though new tariffs on $125 billion worth of imports which will be taxed at 15% proceeded on September 1. For those keeping score at home, in addition to these new tariffs, President Trump announced (1) a 5% increase (to 30% from 25%) on $250 billion in goods that have already been affected and (2) a new round of tariffs on all remaining imports at 15% on December 15, in a tit-for-tat retaliation against China’s tariffs on $75 billion worth of our exports. There’s a lot to keep track of in the current back and forth!
For the week, the Dow Jones Industrial Average led the way, up over 3%, while S&P 500 Index rallied 2.8% and the Nasdaq gained 2.7%. Gains were seen across the board as both Small-Cap and International stocks followed suit. From a sector perspective, cyclical stocks led the way with Communications, Materials, and Financial all seeing the biggest gains. Consumer Staples, Real Estate and Utilities were all positive, but to lesser of a degree.
While the stock markets continue their Dr. Jekyll and Mr. Hyde reactions to trade headlines, a more important note in our estimation, is that forward-looking macroeconomic data continues to deteriorate. Most recently, (and most concerning to us) is that the Industrial Supply Management’s (ISM) most recent Purchasing Manager’s Index (PMI) reading, came in at 49.1. As a reminder, for this index any reading above 50 signals expansion, and below 50 contraction. Prior to the August reading, the U.S. was one of the few manufacturing economies still in expansion territory. As of this month, there are now only a handful of economies (Saudi Arabia, Greece, France, Brazil) expanding, while the rest of the world is contracting.
PMI is important because it is considered a leading economic indicator. In fact, PMI New Orders component is our favorite of the 10 the Conference Board’s Leading Economic Indicators as it is highly correlated with future S&P 500 earnings, as the chart below highlights.
If this relationship holds in the near future, and we have no reason to believe otherwise, it would indicate that future earnings estimates are still too high and will need to come down. It also foreshadows potential weakness in the upcoming Q3 and Q4 earnings releases which begin in earnest in October.
In addition to the August release on Manufacturing PMI, which we noted above, investors will also get updates on Construction Spending, Durable Good and Factory Orders, and Employment data via the official Unemployment rate, Nonfarm payrolls, Hourly Earnings, Average Workweek, and Productivity. Fed Reserve officials also have various speaking engagements highlighted by Chairman Jerome Powell on Friday.
Listed market indices are provided for information purposes only and are not intended in any way to be representative of Cornerstone Wealth Group’s client accounts or performance. The holdings and performance of Cornerstone Wealth Group’s client accounts may differ substantially from the listed indices. Market indices are unmanaged and are not available for direct investment.
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