September 2019 Market Commentary

The S&P 500 flirted with an all-time high for much of September and finished the month nearly 2% higher, despite a series of volatility inducing events over the month. Equities across the globe rallied on rising hopes that the U.S. – China trade dispute would be resolved by year’s end and that global central banks, including the Fed, would continue to provide support.  Ten-year U.S. Treasury bond yields climbed from near post-crisis lows, leading bonds to end the month with a small loss.

The following table contains a summary of September and year-to-date market performance:

Index Sept YTD Index Sept YTD
S&P 500 (Total Return) +1.87%  +20.55% MSCI All Country World (Net) +2.10% +16.2%
MSCI EAFE (Net) +2.87% +12.80% Bloomberg Barclays U.S. Agg -0.53% +8.52%
MSCI Emerging Markets (Net) +1.91% +5.89% 60/40 Blend* +1.05% +13.13%

*60% All Country World Index / 40% Bloomberg Barclays US Aggregate Bond Index

September was marked by what seemed like an unusual number of events that led to elevated volatility.  These included six conflicting announcements about the status of U.S. – China trade talks, attacks in Saudi Arabia that disrupted the world’s supply of oil, Fed announcements about interest rates, the normalization of the yield curve, political events that raised the possibility of impeachment, and a series of reports over the month pointing to weaker economic growth that weighed on market sentiment and led equity markets lower to end the month.

On the economic front, September opened and closed with weak manufacturing data; sandwiched in between were (1) a jobs report revealing a slowdown in hiring, and (2) a Fed rate cut accompanied by comments that the Fed did not expect to cut rates again in 2019.   September opened with news that the ISM U.S. Manufacturing PMI fell to 49.1, signaling a contraction in manufacturing for the first time in over three years.  That led  ISM to suggest that “manufacturing is likely to have acted as a significant drag on the economy in the third quarter.”[i]  A week later, job growth of 130,000 was announced, but it was less than expected.

The Fed announced its second +0.25% rate cut since late summer, but markets barely moved; despite the 2-10 year yield curve which had inverted in late August once again normalizing. It was possibly because more than 75% of investors had predicted the Fed’s actions, or because investors were disappointed in the accompanying Fed statements.  Investors hoping the Fed would signal additional rate cuts intended to offset slowing instead heard Fed Chair Jerome Powell reiterate that the July cut was a “midcycle adjustment” to support the economy amid flagging global growth and to boost inflation, suggesting that further reductions this year were not guaranteed.  While stating that the Fed will act as appropriate to sustain growth, the Fed also provided little guidance as to how much interest rates might move over the next year, possibly in part because of divisions within the Fed.  For the current cut, one of the Fed’s voting members voted for a larger, half-point cut, and two others voted for no cut at all. The vote revealed the largest number of dissenters since 2014, which reflects differing views of the trade war, a global economic slowdown, and worries about a possible U.S. recession.

September ended with reports of weaker growth from Germany and China as well as a second straight month of declining U.S. manufacturing.  Germany’s economy is close to contracting for the second straight quarter, leading to estimates of 2020 GDP growth for Germany and the EU being revised downward to less than +0.5%.  In China, growth in industrial production was at its weakest level in 17-1/2 years, as the U.S.-China trade war dented business confidence, investment, and domestic consumption. While China forecasts 2019-2020 GDP growth of between 6% and 6.5%, thanks in part to new fiscal, monetary, and structural policies kicking in, private forecasts are for China’s growth to fall to 6% in 2019 and 5.5% in 2020.[ii]

And finally, to end the month, the ISM reported its index of manufacturing activity fell for the second straight month to 47.8, its lowest reading since June of 2009, due largely to “trade tensions between China and the U.S. straining business conditions.” [iii] While for much of the year, equity and bond markets have reacted differently to slower expected growth, in this case, each was on the same page, with equity prices and bond yields both falling.  The two-year yield fell to a three-week low, last down 6.4 basis points to 1.56%. The two-year yield is a proxy for investor expectations of Federal Reserve interest-rate policy. Forecasts that the Fed will cut rates at its October meeting rose to 62.5% on Tuesday from 39.6% the previous day.

For much of the year, equities markets have been near all-time highs while bond markets have feared recession.  More recently, equity and bond markets seem to be viewing growth in the same way. For September, equity prices and bond yields rose on hopes of stronger growth. In the absence of a reacceleration of global and U.S. economic growth, The Caprock Group sees limited upside opportunity in equities in the medium-term at current prices.   As a result, Caprock reiterates its recommendation that clients continue to rebalance to our modestly under-weight target equity allocation recommendation.

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[i] HIS Market, CNBC, “US Manufacturing Contracts,” September 3, 2019

[ii] CNBC, “China’s economic growth may be looking at another rough quarter”, September 25, 2019

[iii] CNBC, “Worst Manufacturing Data in a Decade Drives Yields Lower”, October 1, 2019