Weekly Stock Market Recap – Aug 18th 2019

All our recaps here at StockTrader.com are of course critical to all our lives.  But this week’s is extremely critical.  Please read on…

This was yet another volatile week for the market – four of the five sessions saw the major indexes move >1%.  Monday and Tuesday saw somewhat offseting moves in opposite directions (Tuesday’s move was due to Trump backing off tariffs to China until the Christmas season is over), while markets swooned Wednesday to the tune of about 3% down.   A rally Friday saw the markets claw back about half those losses. Until volatility dies down, it is not really too “safe to get back into the water” for those with shorter term horizons.

About that tariff delay:

Products that will not be subject tariffs from September include “cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing,” according to the statement.   The delays mean that goods worth $152 billion, or more than half of the original $300 billion list, will now not be hit with tariffs until mid-December.

“The three-month delay to the imposition of tariffs on more than half of the $300bn of Chinese imports, originally scheduled to take effect next month, is obviously designed to avoid a politically-damaging rise in consumer prices ahead of the holiday season,” said Andrew Hunter, senior U.S. economist, at Capital Economics.

Fun fact:  Goldman Sachs said it now expects a 0.6% drag on the U.S. economy due to trade-war developments, up from its earlier estimate of 0.2%.

Yield curve inversion strikes!  Earlier it was 10 year rate below the 3 month yield which is quite bearish. That caused hand wringing for a bit before “THE FED WILL SAVE US ALL” thinking returned to the market.  This time it was the 10 year yield falling below the 2 year yield.   THIS ONE IS BIG.   “Borrowed time” axiom now is in effect.   NONE of us know what this means for markets because there are so many animal spirits and central bank interventions, but it’s a bad sign for the future economy.  That said the market usually still rises for quite a while before the you know what hits the wall.  But as a participant in the economy it needs to be a part of your financial plan to prepare for a slowdown in the coming 1-2 years.  The Russell 2000 (domestic company heavy) has been showcasing this for a while, as has the housing market which began turning down a year ago as we have outlined.  Global international companies have thus far bucked the trend but the average person is not a global S&P 500 company.

An inverted yield curve often serves as a prelude to a recession because it indicates when monetary policy and financial conditions are too tight for the broader economy. A yield curve inversion along the 2-year/10-year spread has come before the last seven recessions.

Interesting data points:

Even as the 2-year/10-year spread inverts, equities do still have room to run higher.

“After an initial post-inversion dip, the S&P 500 index can rally meaningfully prior to a bigger US recession related drawdown,” BAML strategists said.  When they crunched the numbers, they found that the S&P 500 tended to mount a last-gasp rally, peaking on average 7.3 months after an inversion along the 2-year/10-year spread. (That would be February 2020 ON AVERAGE)

“Research from Credit Suisse says a recession occurs 22 months after an inversion in the two-year/10-year rate curve, on average,”  (That would be June 2021 ON AVERAGE) says Arielle O’Shea, investing and retirement specialist at NerdWallet in Charlottesville, Virginia.   The S&P 500 is up, on average, 12% one year after a 2-10 inversion.  But when a recession did eventually hit, the S&P 500 on average lost around 32% of its value.