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Weekly Market Review

20 August 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending August 16, 2019


U.S. equities declined last week, with large caps down a little more than 0.9% and small caps down about 1.2%. This decline in equities was propelled by the 3% decline Wednesday as Treasury yields plunged led by the 12-basis point decline in the 10-year and the 18-basis point drop in the 30-year to 1.56% and 1.98%, respectively. The 30-year Treasury hit an all-time low of 1.945% Thursday before recovering to close the week at 2.04%.[i]

The market volatility last week and the decline in yields were driven by rising fears of a recession caused by the trade war between the U.S. and China. While the numerical impact of the recent 10% tariffs would only reduce economic growth by about 0.1% of Gross Domestic Product (GDP). The lasting impact would be how the trade war impacts the psychology of investors, consumers, and the business world.

The decline in U.S. equities Wednesday followed news that the Trump Administration will delay the implementation of the 10% tariffs on some of the $300 billion of Chinese imports to the U.S. until December. This was because many in the administration feared the tariffs would damage the Christmas shopping season.[ii] Evidence that the trade war and most recent tariff increase hit the psychology of consumers was supported when the University of Michigan Consumer Sentiment Index was released Friday and showed that consumers have appeared to become more pessimistic. The overall index declined to 92.1 from 98.4 as the current conditions index dropped to 107.4 from 110.7. The most important component of the index, Consumer Expectations dropped to 82.3 from 90.5 in July. The reason for the importance of this number is that it reflects the consumer outlook over the next six months, determining if consumers are going to spend. It is thus more highly correlated to consumer spending and economic activity than either the headline number or the Current Conditions Index (CCI)[iii] which gives us information regarding how consumers have spent over the last month to quarter.

Retail sales which came out Thursday showed consumers spent at retail outlets more than expected with overall retail sales up 0.7%. Excluding the volatile auto component, retail sales were up 1.0% compared to expectations of a rise of 0.5%.[iv] So through July, consumers increased expenditures which will add to economic growth in the first month of the quarter.

Productivity and unit labor costs increased in the second quarter by 2.3% and 2.4%, respectively.[v] These two data points are closely watched by investors because they inform about current and expected inflation. If unit labor costs rise faster than productivity, inflation will increase, whereas if productivity exceeds unit labor costs, inflation will decline. The 0.1% spread in the second quarter indicates that inflation may remain subdued in the near-term.

The Consumer Price Index (CPI) for July was released last week as well and showed that inflation seems tame, rising 0.3% month-over-month and up 1.8% year-over-year. The rise in July was due to increases in the energy index (up 1.3% in July) as oil prices jumped and rents increased.[vi] The equity market turmoil eased Friday as U.S. large caps rose nearly 1.5% as Treasury yields rose helping to reduce fears that a recession was just around the corner.

Other items of note

Industrial production: declined 0.2% in July as the trade war continues to hit manufacturers.

Manufacturing output: declined 0.4% due to the trade war.

Capacity utilization: declined to 77.5% from 77.8% in June. Capacity utilization indicates manufacturing slack in factories across the country. Utilization numbers consistently above 80 and approaching 85 are correlated to rising inflation. Thus, the declining utilization data so far this year is consistent with falling inflation numbers we have seen.


International equities were as volatile as U.S. stocks.  Developed equities were down about 1.5% and emerging stocks declined slightly more than 1.0%. The driver once again was the trade war which caused yields in Europe to fall. This was led by the 10-basis point decline in the German 10-year bond to -0.688% from -0.58% on Monday. Every German government bond out to 30-years now has a negative yield to maturity starting with the 1-year bond at -0.84% out to the -0.22% yield for 30-years. Chinese equities increased on the week with the Shanghai index rising 1.3% with the gain following the news of the tariff delay on Thursday.


Recently, the bond market has been sending the signal that a recession may be on the horizon. The yield curve from 3-months to 10-years has been inverted since early May, and the yield curve overall has been flattening. Wednesday, we saw the yield curve from 2-years to 10-years invert which sent a shock through the equity markets and triggered the 3% decline and sent oil markets into temporary free-fall. This may be the clearest sign that a recession could hit in the next 12-months. On the other hand, consumers continue to spend, as illustrated by July’s retail sales data. Productivity also remains relatively high, and higher productivity typically leads to improved margins and profitability for corporations. There are signals that a recession is not coming, just as there are signals of a pending recession.

News out this week

Existing Home sales

Markit manufacturing PMI

Markit services PMI

New Home Sales

Jackson Hole Symposium

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[i] U.S. Department of the Treasury (2019). Daily Treasury Yield Curve Rates. Retrieved from
[ii] CNBC (2019) Dollar Soars Versus Yen After US Makes Trade Concessions. Retrieved from
[iii] University of Michigan (August 2019), Survey of Consumers. Retrieved from
[iv] U.S. Census Bureau (2019), Advance Monthly Sales For Retail And Food Services, July 2019. Retrieved from
[v] U.S. Department of Labor, Bureau of Labor Statistics (2019) Labor Productivity and Costs. Retrieved from
[vi] U.S. Department of Labor, Bureau of Labor Statistics (2019), Consumer Price Index – July 2019. Retrieved from

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