August Market Commentary

US stocks had a volatile month in August driven by amplified trade and recession fears.  After a lack of progress on trade negotiations, President Trump announced a new 10% tariff starting September 1st on roughly $300 billion worth of Chinese imports that had yet to be taxed.  Trump then delayed and removed some tariffs set to hit $156 billion of Chinese goods, moving them back to December 15th.  Finally, at the end of the month, the President said he would raise the tariff rate on existing and planned tariffs by 5 percentage points.  The tariffs already in place on $250 billion of Chinese goods will increase to 30% on October 1st, and tariffs planned for September 1st and December 15th on an additional $300 billion in goods will increase to 15%.  With nearly all S&P 500 companies reporting, 74% topped earnings expectations and 57% beat revenue expectations for the second quarter. Economic news showed the economy continues to grow but has cooled from earlier in the expansion.  There were 164,000 new hires in July, in line with expectations and the unemployment rate remained at 3.7%.  Retail sales rose 0.7% topping expectations.  Existing home sales rose 2.5% and they posted the first year over year gain in 17 months.  Manufacturing activity declined for the first time since 2009 and revised second-quarter Gross Domestic Product (GDP) showed the economy grew at 2.0%, down from the first reading of 2.1%.  Gold ended the month up 6.5% at $1,519 a troy ounce, moving above $1,500 for the first time in six years.  In August, US stocks fell 2.04%, however for the year to date US stocks are still up 18.02%.

Foreign stocks fell over the month driven by the trade war and weak economic news. In retaliation to US moves, China suspended purchases of US agricultural products and said it would add tariffs of 5% to 10% on $75 billion of US goods starting September 1st. China let the yuan fall below the 7 yuan to dollar level for the first time since 2008, making China’s products relatively less expensive.  The move counteracts some of the impacts of the tariffs applied to their goods.  Economic news out of Europe continued to be mostly disappointing with German industrial production in June much lower than expected, manufacturing activity declining in the eurozone and contraction of GDP in the UK and Germany of 0.2% and 0.1%, respectively.  To combat the weak economy, a European Central Bank (ECB) official said that the ECB will announce stimulus measures in September that will surpass investor expectations.  Central banks in India, New Zealand and Thailand cut their benchmark interest rates more than expected to support their economies and stem weakening growth. UK Prime Minister Johnson moved to extend Parliament’s break in a bid to reduce opposition from lawmakers who want to stop a potential abrupt exit from the European Union (EU). A sudden exit from the EU could create significant trade and governmental disruptions.  Japan posted a 2nd Quarter GDP of 1.8%, far above expectations.  Emerging markets trailed developed markets for the month and year to date.  Foreign stocks declined 2.96% in August, but are up 9.09% for the year to date.

Bonds jumped in August as interest rates sank.  During the month the two-year Treasury yield rose above the yield of the 10-year Treasury, a signal from the bond market that has preceded all recessions over the past 50 years.  Fed minutes from their July meeting showed mixed opinions about the interest rate cut that they made with some favoring a larger cut and others not wanting one at all.  Trade policy was also considered a “persistent headwind.”  At the Fed’s conference in Jackson Hole, Fed Chair Powell spoke about the large disruption to the US economy the trade war is having and stated that the Fed is likely to cut the Fed Funds Rate again soon.  The 10-year Treasury yield plunged over the month falling from 2.02% to end the month at 1.50%.  For the month, government bonds were the top-performing sector and longer-term bonds outpaced shorter-term bonds.  The broad bond market surged 2.59% in August, bringing their year to date return to 9.10%.