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Trade and global growth concerns spark August volatility;  September off to strong start as stocks recover

September 2019


August was a tale of two halves. Despite the Fed cutting interest rates 0.25%, for the first time since 2008, August was greeted with extreme volatility as President Trump announced additional tariffs on China, which escalated tensions. The move put a US-China trade deal in doubt raising concerns about global growth and risk of recession. The Fed’s comments following the July-end rate cut saying that it was a mid-cycle adjustment rather than the start of a new round of rate cuts unnerved the markets as well. The global financial markets responded by stocks selling off and a global flight to quality in bonds driving interest rates even lower. In the first two weeks of August, the Dow posted single day losses of 767 and 800 points on its way to losing 5.2%; however, over the second half the Dow gained over 900 points, or 3.6%, to finish the month down just 1.7%. 

Negative yields overseas, which now exceeds $16 trillion in aggregate, dragged on US rates amid the market turmoil in August.  The US 30-year Treasury Bond yield fell below 2.00% for the first time ever. The widely watched spread of the 10-year Treasury Note yield and the 2-year Year Treasury Note yield closed inverted (long rate < short rate) August 27 for the first time since May 2007. Inversions have historically preceded recessions; though not every inversion has led to recession, it’s always important to monitor. As trade tensions eased at the end of the month, the inversion ended and closed August even.

 

Market QuickTakes... 

  • Despite extreme volatility sparked by US-China trade tensions and Fed speak, most global markets finished the August with modest losses of 2-3% 
  • Positive US-China trade developments at the G7 meeting sparked month-end rally 
  • Small- and Mid-Cap stocks as well as Emerging Markets were hit harder losing 4-5% 
  • US stocks remained positive in double-digit territory for the year 
  • Volatility drove interest rates to new lows for the year, the 10-year T-Note to lowest level since 2016 and the 30-year T-Bond to new all-time low under 2%   
  • US yield curve (10s-2s) inverted for the first time since May 2007 

 

September Update 

The global markets have been susceptible to spikes of volatility both up and down, often due to tweets from President Trump, especially when concerning US-China trade. Following August’s bumpy ride, the global markets followed up on the positive G7 meeting near month-end, with strong gains to start September. At center stage was news that high-level US-China trade talks were set to resume in October, which got the global markets back on track. Ending September 13, US large-cap stocks have gained 2.7-3.1% for the month and are less than 1% from all-time highs. Meanwhile, small- and mid-caps have gained 5.6% and 4.4%, respectively, as they look to make up lost ground from August.  Of note, was some long overdue outperformance of value stocks over growth stocks so far in September.

Foreign stocks have rebounded in September as well, reacting positively to the trade news and the ECB cutting interest rates 0.10% at its September 12th meeting in addition to a new round of quantitative easing (QE) to stimulate sluggish economic growth. This served as front running the Fed, when it meets September 18th and is expected to cut policy rates another 0.25%. Comments will be closely watched following the announcement.

Interest rates have risen sharply from recent lows. The 10-year Treasury Note yield fell to a 2019 closing low of 1.47% Sept 4, just 0.13% from its 2016 all-time low of 1.34%, before closing Friday at 1.90%. The yield curve (10s-2s) has moved slightly back into positive territory as recession concerns have eased. 

 

The Outlook 

Positive trade developments have lifted the global markets yet again in September. Volatility remains in the forecast, however, as we’ve seen US-China trade negotiations wax and wane. Investors are urged to remain resilient in their investment programs as the markets continue to work through ongoing challenges and opportunities. 

 

~Your Nelson Securities Team 

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