Weekly Market Commentary, August 13, 2019

August 13, 2019  | By Robare & Jones

The Markets

Like some employees, the stock market had a great week, if you don’t count Monday. After falling nearly 3 percent on Monday, the market steadied as the back-and-forth between China and the United States calmed. On balance, markets reacted negatively to the news that China allowed its currency to weaken against the dollar. The S&P 500 dropped 0.4 percent. Global stocks also declined as the MSCI ACWI slid 0.8 percent. Bonds rallied on the ongoing weakness in the global economy. The Bloomberg BarCap Aggregate Bond Index rose 0.6 percent. However, despite the recent market swings, the S&P 500 is only 3.5 percent below an all-time high.

Data as of 08/09/2019 1-week YTD 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) -0.5% 16.4% 2.3% 10.2% 8.6% 11.2%
Dow Jones Global ex-U.S. -1.3 6.3 -7.7 2.9 -0.5 2.7
10-year Treasury Note (Yield Only) 1.7 NA 2.9 1.6 2.4 3.8
Gold (per ounce) 3.9 16.9 23.3 3.8 2.8 4.7
Bloomberg Commodity Index 0.3 0.9 -8.8 -2.6 -9.5 -5.0

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Download Market Data Table

 

How Much is a Dollar Worth?

The trade war between the United States and China widened this week as the Chinese allowed their currency to depreciate against the dollar. As the accompanying chart shows, it had taken about 6.9 yuan to purchase $1. It now requires more than seven yuan. The move was a response to U.S. plans to put tariffs on an additional set of Chinese goods. Tariffs make goods more expensive, but a cheaper currency counteracts the effect by lowering the cost of Chinese goods when priced in dollars.

The change doesn’t seem like a big deal, but investor reaction to China’s announcement pushed the market lower by nearly 3 percent. The move was a shot across the bow, a reminder from China it has tools to combat tariffs imposed by the United States.

The move caught everyone’s attention, but the Chinese set the exchange rate so the yuan would buy more dollars than expected. Markets rallied on Tuesday and almost finished positive for the week.

While trade negotiators around the world fight for advantages in revised deals, the global economy continues to struggle. British gross domestic product (GDP) unexpectedly contracted last week, and Canadian employment data was weaker than expected. Most economic data points are telling economists and investors the healthy economy of two years ago is being sustained by strong consumer spending but weakened by lack of business investment. Whether it’s uncertainty created by the United States and China, Brexit, or Korea and Japan, businesses are less likely to invest in expansion when export rules are so uncertain.

Retail sales data this week will demonstrate if consumers in the United States and China continue to support the global economy with strong retail growth or if the consumer is stepping back slightly, too. Investors would welcome an end to the steady escalation of responses between the United States and China, and strong economic data would likely be welcome news, too.

 

Fun Story

Monetary Policy and Lessons from the Drug Cartels
Negative interest rates can still be a better investment than keeping money in cash. The link above leads to a podcast discussion with a Federal Reserve official who points out cash, on its own, can get stolen, lost, or used to fuel the 1998 Tahoe your son inherited. During its operation, the Medellin cartel used to bury large quantities of cash in the jungle. They assumed 10 percent of the money would be unusable. They would have done much better in a German bank account earning negative interest. Maybe rates can go lower than we thought.

 

Sources

https://www.economist.com/finance-and-economics/2019/08/05/why-a-weakening-yuan-is-rattling-markets (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-12-19_TheEconomist-Why_a_Weakening_Yuan_is_Rattling_Markets-Footnote_1.pdf)
https://www.asiatimes.com/2019/08/article/trade-wars-part-two-the-empire-strikes-back/
https://www.bloomberg.com/news/articles/2019-08-06/asia-stocks-to-start-mixed-u-s-shares-climb-markets-wrap
https://www.marketwatch.com/story/what-a-falling-chinese-yuan-means-for-the-stock-market-and-the-trade-war-2019-08-05
https://www.barrons.com/articles/dow-jones-industrial-average-whipsawed-by-trade-tensions-finishes-week-down-modestly-51565396072?mod=hp_DAY_3 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-12-19_Barrons-The_Dow_Whipsawed_by_Trade_Tensions_Finishes_the_Week_Down_Modestly-Footnote_5.pdf)
https://www.ripleys.com
https://www.economist.com/finance-and-economics/2019/08/08/as-yields-turn-negative-investors-are-having-to-pay-for-safety (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-12-19_TheEconomist-As_Yields_Turn_Negative_Investors_are_Having_to_Pay_for_Safety-Footnote_7.pdf)
https://www.barrons.com/articles/how-this-market-will-end-51565369599?mod=hp_DAY_1 (or go to https://peakcontent.s3-us-west-2.amazonaws.com/+Peak+Commentary/08-12-19_Barrons-How_This_Bull_Market_Will_End-Footnote_8.pdf)
https://blog.pimco.com/en/2019/08/interest-rates-naturally-negative
https://www.goodreads.com/author/quotes/1654.Terry_Pratchett