Don’t Flinch
Doug Walters
In the economic game of chicken being played between China and the U.S., both sides appeared willing to flinch with minor temporary concessions being made. Equity markets liked it…
Contributed by Doug Walters , Max Berkovich , ,
Both the U.S. and China appeared willing to give ground on the trade dispute, helping to placate investors, at least for this week. Also helping sentiment was the expectation of continued accommodation from the Federal Reserve, with rates likely to be lowered next week. U.S. stocks ended the week higher, but it was not the usual cast of characters of Growth, Momentum, and Minimum Volatility stocks that rallied. Rather it was Value and Small Cap.
Headlines This Week
After the U.S. extended the deadline for a tariff hike on $250 billion of Chinese imports, China exempted U.S. agricultural products like soybeans and pork from tariffs. In addition, Trump made a statement on Thursday that he may consider an interim trade agreement with China.
- The two rounds of face-to-face negotiations with Chinese officials set to take place in Washington is scheduled for early October.
The European Central Bank (ECB) launched a new quantitative easing program by cutting rates to negative 0.5% and launched a new bond-buying program to pump more money into the economy. ECB President Mario Draghi stated that, “In view of the weakening economic outlook and the continued prominence of downside risk, governments with fiscal space should act in an effective and timely manner.”
- The outgoing ECB President will return home to Italy at the end of October and leave the next chapter of the European stimulus program in the hands of his successor Christine Lagarde.
Brexit – while the U.K. parliament is taking its mandatory five-week recess until October 14th, prime minister Boris Johnson will discuss the “rough shape” of a Brexit deal with European Union (EU) president Jean-Claude Juncker. Johnson is hoping that lawmakers will have little choice but to choose his new Brexit deal. He has repeatedly has said he will not seek an extension of the October 31st Brexit deadline, potentially exit with no deal.
There were no surprises in the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) price index inflation data which are used as monetary policy gauges.
- CPI rose by 1.7% on a year-over-year basis, while the PCE rose by 1.6% during the same period, remaining below the Federal Reserve’s 2% inflation target.
The Week Ahead
The primary focus next week will be on the Federal Reserve’s interest rate decision on Wednesday.
- The majority of investors believe the Fed will cut rates by a further 25 basis points.
- The recent easing of trade tensions has led most experts to abandon the idea of more aggressive rate cuts at this next meeting.
- However, consensus numbers give approximately a 65% chance of at least one more rate cut by the end of the year.
Secondarily, the Federal Open Market Committee will be releasing its monetary policy statement, as well as its economic projections for the next two years, the same day.
- If interest rate cuts play out as expected, most attention will turn to the Fed’s long-term projections for clues as to which direction the Fed believes the economy is heading, and how much lower interest rates may go.
Across the pond, the Bank of England will also be announcing its own interest rate decision on Thursday.
- The BoE is expected to hold rates at 0.75%.
- This will be the last BoE meeting before the UK is set to leave the EU on October 31st.
- The Bank of Japan and the Swiss National Bank are also set to reveal a rate decision.
The Rotation
This week, a rotation from growth and momentum to value, and from borrowers to lenders was on display. The Financial sector was the biggest winner as it benefited from both. Banks become more profitable when rates move higher. Stubbornly falling interest rates this summer had bank stocks trading at a notable discount. Headwinds turned into a perfect storm of tailwinds for Financials at least for this week. On the other side the Consumer Staples, Utilities, and REITs sectors were all laggards. The latter two are borrowers and pay large dividends. Consumer staples also usually pay above-average dividends. All three of the sectors are expensive, thanks to the chase for yield and safety pushing the three sectors to very pricey valuations. Speaking of pricey…
- Apple Corp. (AAPL) held its annual “fall event” where it announces new products and developments. This year’s announcements include… 1) An iPhone 11, 11 PRO and 11 Max. The iPhone 11 Pro will have three rear cameras and 15% better battery life and carry a starting price of $999, the standard 11 will be much cheaper at $699, while the Max will start at $1099. 2) The iWatch will have a 5-series released, which comes with improved 18-hour battery life. 3) the iPad will have a 7th generation model which will have a 9.7-inch display. 4) Apple Arcade will be offered at a cost of $4.99 per month with a September 19th launch date. 5) Apple TV Plus will launch on Nov. 1st. The new TV service will cost $4.99 per month, half of the rumored price. This service will also be offered for free with new Apple devices. The $4.99 price tag undercuts the current rates other streaming services charge.
- In other news, Oracle Corp. (ORCL) released earnings a day earlier than planned. The company reported a weak quarter and missed sales expectations, thanks to a 10% drop in hardware sales year-over-year. Lastly, Co-CEO Mark Hurd will take a health-related leave of absence. His duties will be covered by the other Co-CEO, Safra Catz, and Chairman and Co-Founder Larry Ellison. The company also allocated an additional $15 Billion to its share buyback program.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 1.0 | 20.0 |
| S&P 400 (Mid Cap) | 2.7 | 18.0 |
| Russell 2000 (Small Cap) | 4.8 | 17.0 |
| MSCI EAFE (Developed International) | 1.2 | 10.8 |
| MSCI Emerging Markets | 1.4 | 5.9 |
| S&P GSCI (Commodities) | -0.3 | 7.8 |
| Gold | -1.2 | 15.6 |
| MSCI U.S. REIT Index | -1.6 | 20.1 |
| Barclays Int Govt Credit | -1.2 | 3.7 |
| Barclays US TIPS | -1.8 | 5.1 |
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