Market Update - September 3, 2019Submitted by Jodi Vleck , Beta Wealth Group on September 3rd, 2019
U.S. equities rebounded last week due in part to higher optimism over a U.S.-China trade war resolution, driven partly by the Chinese government request for calm and President Trump's claim that the Chinese government wanted to cut a deal. Overall, market sentiment has been driven by the U.S.-China trade spat for months, with little substantive news to report other than shorter-term rumors, which makes the current market hard to trade directionally. Sectors that have suffered of late, such as Industrials, Materials and Communications fared best with 3%+ returns, while Defensives such as Consumer Staples and Utilities lagged a bit. In economic news, stronger durable goods orders and personal spending data were offset by weaker jobless claims and consumer confidence numbers.
By some valuation measures, such as the dividend discount model approach, US equities have moved from ‘fairly valued’ to ‘more attractive', especially in the context of the downward move in the 10-year note. Absent substantial changes in other inputs such as earnings expectations or earnings growth rates for future years, lower discount rates favor higher valuations, which explains why higher multiples can potentially surface during periods of lower rates.
Foreign equities gained ground in similar magnitude to U.S. equities, with emerging markets leading the way and the U.K. lagging a bit. Considering threats over a suspension of the U.K. Parliament for more than a month to protect against anti-Brexit sentiment and potential 'no confidence' votes on Prime Minister Boris Johnson, UK markets fared better-than-expected. Elsewhere in Europe, Italian assets rose with a new political coalition being agreed upon, while the removal of multi-year capital controls in Greece lifted equity sentiment there as well. Within Emerging Markets, Chinese markets experienced gains consistent with improving trade sentiment, while markets in Latin America markets lead the way.
U.S. bonds ticked a bit higher with the modest change in the yield curve last week, with the rally in risk assets causing both investment-grade and high yield corporate credit to outperform government bonds in the U.S.. With the U.S. dollar rising over 1% for the week, this had a negative influence on foreign developed market bonds which lost ground, while emerging market debt performance was mixed. In recent weeks, the U.S. Treasury has been discussing the possibility of issuing an ultra-long-term bond, one with a 50- or 100-year maturity, consistent with the demand for safe assets.
Real estate assets in the U.S. gained nearly 2%, on par with broader equities markets, while foreign Real Estate Investment Trusts (REITs) also experienced positive returns. Commodities markets generally fared well for the week, despite the normally-negative influence of the stronger dollar; while agricultural prices declined with stronger crop yields, energy and industrial metals gained with the price of crude oil rising by almost 2% to $55/barrel.