Market Update - August 13, 2019Submitted by Jodi Vleck , Beta Wealth Group on August 13th, 2019
U.S. equities started the week on a sour note following a breakdown in the U.S.-China trade negotiations, China letting its currency weaken past the psychologically important 7 yuan-to-the-dollar level and the US labeling China as a ‘currency manipulator’ in response to the aforementioned currency moves. While large cap companies again outperformed small caps, exacerbating the poor sentiment for the latter, sector action were mixed last week with defensive sectors such as Utilities and Health care leading the way and the worst performing sectors being Energy, Financials and Communication Services. On the economic front, weaker-but-still-positive ISM non-manufacturing data was offset by a strong jobless claims report.
With respect to earnings season, per Factset, about 90% of S&P 500 companies have now reported earnings with 75% of firms beating expectations, while revenue growth however remains at the slowest pace over the past several years. Judging by CEO/CFO commentary on these earnings calls, concerns over tariffs have taken greater precedence on earnings calls especially in the industrial, consumer discretionary and technology sectors.
Foreign stocks underperformed U.S. equities, despite the tailwind of a weaker dollar, with Europe faring best followed by Japanese and Emerging markets. During a typically slow August trading season in Europe, Italian officials announced the fall of a coalition government and potential new elections, German industrial output declined more than expected while the British economy contracted for the first time in seven years. Interestingly, Chinese trade data for the prior month came in stronger than expected, with exports up 3% year-over-year. However, Chinese equities still struggled due to the escalation of trade tensions. Elsewhere, central banks in India and New Zealand joined the chorus of global central banks cutting rates, which aided equity sentiment.
U.S. bonds fared well as interest rates continued to drift lower, alongside expectations for more future Federal Reserve rate cuts. Treasuries (especially the long bond) outperformed investment-grade corporates and high yield bonds, which were held back by wider credit spreads. A slumping U.S. dollar buoyed foreign developed market debt, while emerging market hard currency bonds were not far behind. Real estate sector bucked broader US Equity trends, with U.S. REITs gaining a percent for the week, led by healthcare and storage REITs while mall REITs lagged. Commodities were mixed with lower prices for crude oil and natural gas being offset by a spike in precious metals, which tend to perform well as interest rates fall significantly.