By Pete Biebel, Senior Vice President
In a week dominated with trade war and central bank news, and following on the heels of their worst week of the year, the major averages ended last week with relatively minor losses. Both the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) lost about 0.5% and the Dow Jones Industrial Average (DJIA) was lower by about 0.75%. What those numbers don’t reveal is the amount of ground the indices covered during the five trading sessions.
In the prior week, SPX had about a 4% range for the week, beginning at its high and ending near its low. Think of it as a 400-mile trip straight south, say Chicago to Nashville. Again last week, the broad averages had about a 4% range, but they wound up roughly back where they started. Again, the week’s trajectory began with a direct southerly heading. SPX lost about 3% on Monday; think Chicago to Evansville, Indiana. From there it headed back north by about 1.3% on Tuesday, roughly from Evansville back up to Terre Haute. Monday’s rout was in response to China allowing its currency to devalue steeply. Tuesday’s bounce came after Chinese authorities stepped in to, at least temporarily, stop the Yuan’s depreciation.
Wednesday was the leg of the journey that perhaps saved the trip. The day began with a steep gap-down opening; the decline was in reaction to news that central banks in India, New Zealand and Thailand had cut their key interest rates unexpectedly or by more than expected. In the early minutes of trading, DJIA dipped slightly below its Monday low before beginning to rebound. Thankfully, COMP and SPX both held at a higher low. After that opening drive south, the averages slowly crawled back north and ended the day about where they had begun. What started out as a potentially very bad day, ended with the averages near unchanged; it was a one-day version of how the week as a whole played out.
The journey back north picked up speed early Thursday after Chinese officials took further action to stabilize their currency. The all-day trip to the north landed the indices back in Chicagoland, back up to the levels at which they began the week. On Friday, the averages were in the red all day but finished the session with just minor losses.
Two of the biggest gainers last week were Gold and Ten-Year Treasury Notes. Gold rose nearly 4%, ending the week above the $1500 per ounce level for the first time in more than six years. Gold has climbed more than 25% from its late-2018 lows and about 17% in just the past three months. The same factors that spooked the stock market early in the week drove flight-to-safety buying in Treasuries. Ten-Year Notes rallied to near their all-time high of three years ago. That rally briefly pushed the Ten-Year yield down to as low as 1.60% Wednesday morning. The pressure on rates eased as stocks rebounded in the second half of the week. The Ten-Year yield was at 1.73% late Friday, its lowest weekly close in nearly three years.
With precious metals and bonds in rally mode, it’s no surprise that materials and interest rate-sensitive stocks outperformed other sectors. The Real Estate and the Utilities sectors were the best performing equity sectors last week, gaining about 1.8% and about 1.4% respectively. The Basic Materials sector was third best of the equity sectors with a gain of 0.7%.
The Financials sector lost about 1 ½% in response to the huge interest rate swing. Only the Energy sector had a worse week. That sector lost a little more than 2% for the week as the price of Crude Oil sank on concerns over increasing supplies and declining demand. That was the Energy sector’s fourth consecutive weekly loss; it has tanked about 8 ½% in the past month.
Small-caps, as measured by the Russell 2000 Index (RUT), underperformed again. RUT lost another 1.4% last week. It spent most of the week below its 200-day moving average and it ended the week below that average for the first time since late-June.
Last week I wrote that falling below 2950 on SPX was a concern. After ending that week near 2932, SPX dove into the low-2800s on Monday and stayed below 2900 through the first three trading sessions of the week. The index shot back above 2900 on Thursday’s rally but stalled in the area of its 50-day moving average in the 2935 neighborhood.
The lack of follow-through on the early-week selling and the rebound that erased nearly all of the week’s early losses are positive signs that reduced some of the prior week’s southerly bias. But, the failure to reclaim the 2950 level when it was within easy reach and the continuing underperformance of small-cap stocks are indications that last week’s rebound might still be just a brief rally in a continuing downtrend.
Sustained trading above the 2950 level of SPX would go a long way to eliminate the negative impact of the early-August losses. What we need to be on guard against is a decline that takes out the lows of last week. If SPX breaks below the 2875 level again, then a return trip to those lows and a test of the 200-day moving average near 2793 would be likely.
Again this week, trade war rhetoric and more surprise central bank maneuvers are unscheduled, but not unlikely, events that could roil the markets. The scheduled economic reports are far more numerous than last week, with Thursday’s long list loaded with the more significant data points of the week. The number of earnings reports is smaller than last week, but nevertheless includes several prominent names.
|Tuesday 8/13/2019||NFIB Small Business Optimism Index||103.3||103.0|
|Consumer Price Index, M/M||+0.1%||+0.2%|
|Consumer Price Index, less Food & Energy, M/M||+0.3%||+0.2%|
|Wednesday 8/14/2019||Import and Export Prices, Imports, M/M||-0.9%||-0.1%|
|Import and Export Prices, Exports, M/M||-0.7%||-0.1%|
|Thursday 8/15/2019||Jobless Claims||209K||208K|
|Philadelphia Fed Business Outlook Survey||21.8||11.1|
|Retail Sales, M/M||+0.4%||+0.3%|
|Retail Sales, less Autos & Gas, M/M||+0.7%||+0.5%|
|Empire State Manufacturing Survey||4.3||2.5|
|Productivity and Costs, Non-Farm Productivity, Q/Q, SAAR||+3.4%||+1.5%|
|Productivity and Costs, Unit Labor Costs, Q/Q, SAAR||-1.6%||+2.0%|
|Industrial Production, Production, M/M||0.0%||+0.1%|
|Industrial Production, Manufacturing, M/M||+0.4%||-0.1%|
|Business Inventories, M/M||+0.3%||+0.1%|
|Housing Market Index||65||66|
|Friday 8/6/2019||Housing Starts, SAAR||1.253mm||1.260mm|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market