Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Way Too Early to Call It a Comeback

Stocks ended the week on the soft side as a series of factors weighed in on the trading action. These included credit issues among several emerging markets, demand problems within the semiconductor/memory sectors, and Trump’s latest tariff salvo (on $267 billion worth of Chinese goods).

The headlines claim that there’s been some sort of “rout” within many of the indices, and therefore it must be a good time to buy.  However, the worst performing index in the world so far this year, Turkey’s Borsa Istanbul 100 (XU100), though off about 22.8% from its high and 19.13% YTD, is short of the technical definition of a bear market (>20% in two months’ time). Semiconductors here in the US have been weak as well, but that index (Phili Sox) is off only 4.4% from its high, and is still positive by 8.60% YTD. I’m picking at things here, I realize, but we are far from crisis levels in stocks (or bonds for that matter). It’s reasonable to assume we’re headed in that direction given that central bank quantitative easing (QE) policies have had to morph into some form of quantitative tightening (QT) in an attemptto stave off complete disaster (e.g., Argentina’s policy rate is now at 60%).

The economic data released this week had a few surprises that sustained the bulls through an otherwise tough week. The ISM manufacturing and non-manufacturing (i.e., services) indices both touched on new interim highs – primarily on an increase in new orders. At the same time, the nonfarm payroll report touted as “stellar” showed that 201,000 jobs had been created along with a decent increase in wages – which is still below where things were in 2014. All this occurred in the month of August. Keep in mind that the ISM data is opinion-based, and may be the result of an inventory rebuild following extensive disaster recovery spending in May and June. Also, it takes more than 250,000 new jobs to be considered expansionary. In any case, we’ll get a better picture of things when more relevant or important data is released in coming weeks.

Away from all that, Treasuries fell across the curve on the increase in trade tensions and the so-called better economic data. The 2-year Treasury yield hit a new interim high of 2.70% while the spread between it and the 10-year widened to 23 from 20 last week. Oil fell on an unwelcome increase in both production and supplies. A stronger dollar (again on trade issues) held the metals in check as gold oscillated around the $1,200/oz mark. Next week we’ll get another look at inflation via the CPI and PPI, while the consumer credit and retail sales data will tell us more about recent consumer spending patterns. Stock bulls will of course be waiting on some resolve with China on the subject of tariffs, but I suspect that the best of that situation and its effect on the metals has already been discounted.

Best regards,

David Burgess
Vp Investment Management