- On September 12, 2019
- economics, in the news, investment, Investments, market, market update, News, Stock Market, stocks, Wall Street
Cornerstone’s Week on Wall Street
Highlights for the week:
- • Stocks advanced again last week on positive trade commentary
- • Risks to the economy continue to mount, caution remains warranted
- • Central bank policy outcomes in coming weeks will be key for asset prices
Markets rallied for a second week, following a four-week losing streak. Overall sentiment was boosted by news that the U.S. and China plan to meet in person early next month to discuss trade, although it is still unclear how much progress may be made. The S&P 500 Index and Nasdaq both advanced 1.8% for the week, along with the Dow Jones Industrial Average up 1.5%. The more economically sensitive sectors energy, consumer discretionary and technology sectors led the way. Defensive areas such as utilities, health care, and consumer staples, while still positive, lagged the broader markets.
Over the last year, global equities are up just 1% while the bell-weather S&P 500 is up just 4%. While markets have been volatile, with sharp swings in both directions, little real progress has been made. After the challenges of the last 12 months, a reasonable question to ask is whether conditions are better, worse, or similar to a year ago when we sat at similar levels. Broadly speaking, we think they’re worse. Relative to September 2018:
- • Global growth has deteriorated, with US, eurozone and China Purchasing Manager Index (PMIs) falling below 50 and showing acute weakness in new orders.
- • The global trade backdrop is worse, with volumes falling and US-China tensions escalating despite repeated reports of progress.
- • Government bond yields and the yield curve are sending more troubling signals, with the market pricing in more and more policy easing but lower and lower long-term rates and inflation.
- • Oil and copper prices are lower, consistent with more challenging global growth.
- • Earnings growth globally has decelerated sharply. Global equity earnings were growing at 17%Y in 3Q18. For 3Q19, they’re growing at just 1%Y.
In short, investors are returning to similar levels in equity and credit as a year ago and a backdrop that’s at least as unsettling. Since the last 12 months were no walk in the park, we think caution is warranted.
Global central banks take the stage over the coming weeks as investors anticipate continued easing. The European Central Bank (ECB) is on deck this week, with a policy rate decision due on Thursday. The market expects a 10 basis point (bps) reduction in the policy rate from -40 bps to -50 bps. (100 bps = 1%). In addition to a rate cut, there is also talk that the bank may move forward with Quantitative Easing (direct asset purchases), and could implement an interest rate tiering system to help the banks who have struggled mightily with negative interest rates. The results of this meeting will have ripple effects across global markets, and will undoubtedly influence changes in the U.S. dollar, global interest rates, and global equities. On the economic docket in the U.S., investors will get updates on inflation from the Producer Price Index (PPI) and Consumer Price Index (CPI), along with Retail Sales, and Consumer Sentiment.
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