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09 August, 2019 Market Commentary

Bond Yields Plunge and Stock Volatility Soars


Market Commentary for the week ending August 9th, 2019

Summary

  • U.S. government bond yields plunge to 3-year lows on concerns of slowing global economic growth
  • Stock prices initially plunge but then spend most of the week recovering to close with just modest losses
  • China’s stock market fell this week leaving it negative year-to-date while large U.S. stocks have climbed +16.7%

 

Market Performance Summary

Source: www.YCharts.com

Notable Market Headlines

Then tensions between the U.S. and China are feeling more like a trade war than simply a dispute that needs to be negotiated. China says it will halt purchases of U.S. agriculture products and then let its currency float to levels relative to the dollar that Chinese government had previously supported. Trump retaliated saying he is putting tariffs on an additional $300 billion of Chinese goods. Investors expect all of this will likely continue to slow global economic growth resulting in falling bond yields and volatile stock markets.

At the closing bell this week large U.S. stocks were lower by just -0.5% as measured by the S&P 500 while small U.S. stocks declined by -1.3%. This relatively small decline masks the week’s significant, but not entirely out of the ordinary, volatility as illustrated in the accompanying graph. As it shows the range between the high and low for the Dow Jones Industrials jumped above 2.5% on Monday and was surrounded by multiple days of relatively high volatility but you can see that even just year-to-date that this is not entirely unusual behavior.

Source: www.YahooFinance.com

The NASDAQ Composite, generally seen as a measure of technology stock performance, closed the week down just -0.6% but did exhibit slightly more volatility than the S&P 500 and Dow Industrials. Year-to-date the S&P 500 is up +16.7% while the NASDAQ holds onto a +20.0% gain.

International stocks experienced much of the same behavior we saw in the U.S. with developed markets down -1.2%. Weighing on these markets is, of course, the escalating trade war also combined with reports this week showing Europe’s economy is very sluggish.

International emerging markets where down -1.7% with China’s market was among the worst performing falling -2.8% for the week putting it in negative territory for the year with a loss of -0.9%. Although it has generally felt like a fairly strong bull market for investors in U.S. stocks this year, the same has not been so true for investors in international stocks. Developed markets are the strongest, up +7.1% for the year, while emerging markets have gained just +2.1%.

Gold was clearly a go to save-haven for investors holding on to a gain of +4.0% for the week even in spite of stocks recovering most of their losses. Real estate stocks also performed well gaining +1.1% for the week likely following the lead of bond prices as falling bond yields make the high dividends paid by real estate stocks more attractive. Commodities fell as the price of oil declined.

The heightened prospects of a continued slowing global economy impact by trade-related issues and more sent bond prices surging, up +0.6% for the week, and yields plunging. The yield on the benchmark U.S. Treasury Bond fell to 1.748% and is now down 0.303% since the start of the month. The accompanying graph shows the price of a fund invested in Mid-term U.S. Treasuries during the past decade and the surge in prices since late last year. You have to go back to early 2010 and 2011 to find other periods when prices have move this fast.

Source: www.YahooFinance.com for symbol IEF

Stock Highlights

Advanced Micro Devices (AMD), a semiconductor manufacturer, announced the launch of its second-generation EPYC server processors and expects to add Google and Twitter to its customer list. This new chip significantly increases speed and cuts costs putting pressure on its biggest rival Intel (INTC). AMD’s stock was the best performer among the S&P 500 stocks up +16.1% for the week and +85.2% year-to-date!

CVS Health (CVS), an integrated healthcare services business with nearly 9,800 pharmacies, reported quarterly earnings that topped Wall Street estimates on $63.4 billion in revenue. There were a variety of factors within its various business units contributing to this better-than-expected report. The stock gained +6.4% but remains lower for the year by -9.5%.

TransDigm Group (TDG), a commercial aircraft and defense contractor with a $29 billion market value, reported quarterly sales up 69% compared to the prior year and earnings up 23%. Management went on to provide guidance for the remainder of the year and into next year will be better than originally expected. As the accompanying graph shows, growth in quarterly revenue has been accelerating the past 4 quarters. This stock jumped +15.7% for the week and is up +60.2% year-to-date. Northrop Grumman (NOC), another company with exposure to defense, also rallied +8.6% for the week.

Source: www.YCharts.com

Kraft Heinz (KHC), the third largest food and beverage company in North America, reported preliminary results for the second quarter. It was another disappointment for the company with both sales and earnings declining. Furthermore the company is taking an additional and unexpected $1.2 billion impairment charge related to the valuation of its various businesses. The company has been struggling the past three years with its stock down -72% from its 2017 high that includes this week’s drop by -17.2%. Warren Buffet has a very large position in this stock costing his Berkshire Hathaway billions of dollars this year alone.

Economic Indicator - Reported

There continues to be few signs of inflation as the Producer Price Index (PPI), a measure of wholesale inflation, rose just +0.2% last month and is up +1.7% during the past 12 months. When removing food and energy from the number, known as the Core PPI, prices actually declined by -0.1%.

The Institute for Supply Management’s (ISM) nonmanufacturing index, otherwise known as the services index, slowed to a reading of 53.7% in July from 55.1% in June. This is yet another sign of the U.S. economy continue to slow.

Economic Indicators – Upcoming

The following economic data is expected in the coming week:

  • Consumer Price Index (CPI)
  • Retail Sales
  • Housing Starts
  • Consumer Sentiment Index

Contact Mark A. Patton :