September 17 2019 Market Update

A Rise in Volatility

The Wall Street Journal described August as “head-spinning” for stocks, and we can’t disagree.^[1] The month brought ever-changing news on trade and global economic prospects, and the S&P 500 feel at least 2.5% on three different days as investors grappled with what might come next. With fears growing, the yield on the 30-year Treasury bond fell to the lowest record ever.

That said, the S&P 500 is still up 17 percent for 2019, but we’re still just short of the record close the index experienced in July.^[2]

In this month’s newsletter, we’ll cover one current area of concern, namely the state of the manufacturing industry, and some of the possible directions we could go from here. Of course, we aren’t able to tell you what’s going to happen next, but we can offer some lessons from history and our own experiences with volatility.

Warning Signs in Manufacturing

Manufacturing activity fell in August. The Institute for Supply Management’s purchasing managers index fell below 50 in August, a signal of a contraction in manufacturing. New orders dropped to levels not seen in seven years. According to Federal Reserve measure of manufacturing output, the sector is in a recession after declining for two consecutive quarters.^[3]

How Critical is this for the Broader Economy?

On that point there is some debate. Manufacturing only accounts for about 12 percent of US economic activity,^[4] and the services sector seems to be hiring and growing well.^[5]

Overall, the US added 130,000 non-farm jobs in August, though this was boosted in part by the government’s hiring of 25,000 temporary Census Bureau workers. Monthly job growth for the past three months averaged 156,000. Over the past eight years, the US economy added an average of 190,000 jobs per month.^[6]

Where We Go From Here

In other words, growth looks to be slowing, and it’s largely accepted that the Fed will cut rates again at its next meeting.^[7] Fed Chairman Jerome Powell stated recently that the Fed isn’t expecting a recession, considering growth, the labor market, and inflation nearing the Fed’s target.^[8]

He did, however, point to “significant risks” for the economy, which the Fed is monitoring. These include threats to global growth, trade policy uncertainty, and low inflation.

Those worries have spilled over into consumer perceptions: while it’s still high, an index measuring consumer sentiment fell in August at the steepest rate since 2012. Approximately one-third of survey participants mentioned tariffs in their responses.^[9]

Among S&P 500 companies, mentions of tariffs on earnings conference calls rose 40% in the second quarter, with 124 companies mentioning the issue. Year-over-year earnings have fallen for the past two quarters, and earnings estimates for the rest of 2019 have declined.^[10]

Additional escalations of the trade dispute between the US and China could contribute more to volatility and negative perceptions, and this could begin to affect hiring and corporate earnings more broadly.^[11]

The Lesson for Investors

We are no strangers to volatility, and to some degree we expect more. Volatility in the S&P 500 spiked in August, with three days that saw declines of over 2 percent and seven days that saw 1 percent or more in gains.^[12] It can feel like whiplash to watch these moves as an investor, but in our experience volatility tends to beget volatility – in other words, both upswings and downswings could be on the horizon.

We believe it is imperative to keep a broader view. If trade worries had prompted you to pull out of equity markets at the beginning of this year, you would have missed out on participating in the nearly 17 percent growth in the S&P 500 through August 2019.^[13]

Making those calls is pretty much impossible to do consistently and accurately, which is why we so strongly believe in the power of diversification. Sometimes the result may limit your upside potential for gains but it may limit your downside loss by averaging out risk and volatility: if and when markets fall – and it is our experience that at some point, they will and do – being appropriately diversified and risk-managed may help  shielding your savings from the worst of the downside.

Naturally, the specific strategy that we recommend for your portfolio is unique and dependent on the many risk factors, objectives, and other financial and personal realities that you face. We are always happy to talk about your risk exposures and the potential impact that geopolitical and economic factors could have on your portfolio.

Volatility can be stressful, but having a clear sense of your strategy and the path through it can make a huge difference. To that end, please don’t hesitate to reach out if you’d like to talk about current events and how they relate to your portfolio. We’re always here for you!

JSF Financial