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Weekly Market Review

06 August 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending August 2, 2019


U.S. equities declined last week, with large caps down about 3.1% and small caps falling a bit more than 2.8%. The biggest news to hit the markets was an unexpected announcement by the Trump administration that the U.S. would be adding a 10% tariff on $300 billion of Chinese imports. This news sent large caps down almost 0.8% Friday. The majority of the products affected by the new tariffs are consumer products, so the U.S. consumer will pay the full 10% on those goods, previous tariff costs were at least partly absorbed by corporations rather than passed to the end consumer. China retaliated by suspending all imports of U.S. agricultural products. This round of tariffs will likely increase the fear surrounding the economy. From a purely numerical perspective, they will be little more than a blip on the economy. The U.S. economy is approximately $21 trillion, and the 10% tariffs will produce an added burden on the economy of $30 billion, so the $30 billion “tax” is 0.14% of $21 trillion.

What should have been the most significant news item last week was the decision by the Fed to reduce the target federal funds rate by 0.25% in response to the slowing economy. This more accommodative stance by the Fed began earlier this year in an effort to help keep the economy on a sustainable course. According to the Fed, economic indicators point to this effort being successful, and this rate reduction is another action to promote the expected path of approximately 2% GDP growth. Second quarter GDP grew at 2.1%. The new tariffs would reduce GDP to about 2.0%, give or take. The ultimate effect, of course, may be very different depending on how the tariffs affect confidence and sentiment. If these factors are significantly reduced, then the resulting hit to the economy could send us into a recession. The increase in recession risks sent bond yields down, with the 10-year Treasury down 22 basis points on the week to 1.86% at close Friday and the 3-month T-bill declined 6 basis points to 2.06%. The yield curve was sent deeper into inversion in the 3-month to 10-year segment. There was positive news in the economic reports out last week. First, the U.S. economy added 164,000 jobs in July and wages grew by 3.2% year-over-year in the month. The Institute for Supply Management (ISM) manufacturing index showed the sector slowed further in July, falling to 51.2% from 51.7%. However, new orders, a leading indicator of the index, rose from 50.0% to 50.8%.


International markets responded very similarly to U.S. markets with developed equities falling about 2.6% and emerging market stocks down about 4.3%. The tariffs imposed by the U.S. have increased uncertainty regarding trade policy not only between the U.S. and China but also other trade agreements. Prior to the imposition of this round of tariffs, the conditions in Asia were possibly stabilizing as China’s manufacturing sector rose to 49.9 in July from 49.4 in June. Output and demand had stabilized and even increased slightly in July led by domestic demand. European manufacturing, on the other hand, deteriorated further, with the Eurozone manufacturing index falling to 46.5 from 47.6 in June. The largest manufacturing component in the Eurozone, Germany, declined to 43.2, which is an 84-month low. The new orders component fell in July, indicating that a rebound in the Eurozone manufacturing is still several months out without the headwind of the latest round of tariffs.


The global economy has a new negative to contend with in the escalation of the trade war between the U.S. and China. The numbers show that the new tariffs are a small hit to the U.S. economy, but the problem is the effect on sentiment and confidence, both business and consumer. If the consumer reduces spending, it might be enough to send the economy into a recession. The bright spot within the ISM report, new orders, could be short-lived if the new tariffs further dent business confidence, which took a hit from previous tariffs. The increased fear sent oil prices down last week while gold prices surged higher to a six-year high in Monday trading. The previous reactions to tariffs were short term declines that quickly reversed, so a wait and see approach may be wise.

CNBC (2019) China reportedly halts US agricultural imports in retaliation for Trump’s tariff increase. Retrieved from
CNBC (2019) Fed Chairman Powell says rate move was a ‘midcycle adjustment,’ hinting more cuts not a guarantee. Retrieved from
U.S. Department of the Treasury (2019) Daily Treasury Yield Curve Rates. Retrieved from
U.S. Department of Labor, Bureau of Labor Statistics (2019), The Employment Situation – July 2019. Retrieved from
Institute for Supply Management (2019), July 2019 Manufacturing ISM® Report On Business®. Retrieved from
Caixin Purchasing Managers’ Index™ (2019), Caixin China General Manufacturing PMI™. Retrieved from
PMI by IHS Markit (2019), IHS Markit Eurozone Manufacturing PMI® – final data. Retrieved from

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