September brought an economic event that was widely expected: a quarter-point cut in short-term interest rates by the Federal Reserve. It also brought an attack on two of the world’s largest oil fields that threatened to dent global crude output and threats of impeachment proceedings by the House of Representatives. A resumption of U.S.-China trade talks was scheduled for October, and White House officials decided to delay some planned tariff increases.
Clear signals of an economic slowdown emerged from both the eurozone and China; some of the key U.S. economic indicators looked much better by comparison. While all these events transpired, the S&P 500 gained 1.72% for the month. (1)
China Trade Update
Trade representatives from the U.S. and China were scheduled to restart negotiations on October 10. At mid-month, White House officials said that a planned 5% increase in tariffs on certain Chinese imports would be postponed from October 1 to October 15 to honor a request made by Chinese Vice Premier Liu He. Late in the month, stocks fell on a rumor that the White House was considering limits on U.S. investment in Chinese companies. The volatility will almost certainly increase towards the middle of this month with these negotiations.
Domestic Economic Conditions
An important gauge of U.S. manufacturing, the Institute for Supply Management’s monthly Purchasing Managers Index (PMI), fell below 50 in August. That news broke early in September, and the number (49.1) was important because any reading below 50 signals sector contraction. Meanwhile, ISM’s Non-Manufacturing PMI came in at 56.4 in August, showing expansion in the U.S. service sector for the 115th straight month. That 56.4 was its best mark since May. (2)
The PMI is a key economic indicator as it is a measurement of manufacturing output. Historically speaking, when manufacturing output is rising, it's a fundamental sign that an economy is firing on all cylinders and growth will continue. While Wall Street is still digesting this news, it does not help gain the confidence of most economic analysts that growth will continue at the pace we have seen over the last decade.
The next earnings season is less than two weeks away. Earnings growth is one of the pillars supporting the stock market, and if earnings are strong and forecasts are solid, that may help to dispel, or at least ease, anxieties on Wall Street about a slowing economy. Weak earnings would invite questions about whether companies are going to keep investing and hiring at their present pace.
Last October spurred an onset of volatility in the markets. We are becoming increasingly dependent on good news coming out of the China trade negotiations to support current market prices in the face of some weakening economic data. While October has historically been a volatile month, the end of the fourth quarter has generally been strong for the markets. By November, we expect far more clarity for the medium to long range trend of the equities market and continue to manage our portfolios with caution during this time.
Monthly Financial Tip:
One school of household money management says that you should strive to pay down your smallest-balance debt first. Doing that frees up money to pay off larger balances.
1 - money.cnn.com/data/markets/sandp/ [9/30/19]
2 - instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 [9/5/19]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.