It was another roller-coaster ride of a week; one in which the most recent of market stress seemed to be attempting to mend. In fact, until Friday, the market was up a little more than 1% and the VIX, a widely watched measure of market volatility was beginning to appear calm. Investors appeared optimistic that Fed Chair Jay Powell would deliver a dovish and re-assuring tone during his speech in Jackson Hole, WY. In fact, most believe he delivered what the market was looking for: a conciliatory tone acknowledging that global economic conditions have continued to weaken since the late-July cut and monetary policy increasingly looks out of sync with the global situation specifically citing escalating trade friction.
Unfortunately, Powell’s speech turned out to be only a footnote by day’s end. The markets were dealt a pair of alarming “punches” as China announced retaliatory tariffs and Trump took to twitter with hostility directed at both China and the US Fed. In response, the market slumped sharply, skidding -2.6% Friday and finishing the week back near the lows seen on two occasions earlier this month (first on trade; and a week ago when the yield curve first inverted). From an economic perspective, the biggest news for market participants continues to be on the implications of sovereign yield curves. As highlighted in our note on August 14, the condition of the yield curve is significant as to its signal about the possibility of economic recession developing. Related, there was not much good news last week from data either as manufacturing data looks soft; corporate profits and US job counts were revised down; and key input commodities prices like copper and oil are hurting.
As we enter a new week (and final week of August!), the roller coaster news cycle continues. Trump’s Friday tweet “commanding” US companies to cease business with China immediately, and news over the weekend highlight the reality that trade tension is likely to persist and that investors need to remain data-driven. There are items that remain supportive: the US consumer continues to be a source of strength. And expectations are that corporate earnings continue to advance over the coming 12 months. Today, news is reporting Trump’s interactions with G7 members this weekend were generally positive and that Trump and Xi (and negotiators) reconnected last night expressing desire to get talking again; as one might imagine stock prices are trying to rebound some as of this note. The reality is that it is in neither country’s interests to totally stop doing business with each other. The FOMC will almost certainly ease monetary policy when it meets in September and at this point, a strong case can be made that they should implement a more aggressive cut in the form of 50bps, but a quarter-point is probably more likely (with at least one more before year-end). The Fed did not choose the trade war; but there is a need to respond now considering they are tasked with objectives of full employment and price stability (an economic recession is at conflict with both).
Some Technical Analysis notes: It is worth acknowledging that trading volume in August tends to be light (Friday volume was very light despite the alarming selloff). Said different, market reaction to news can be magnified when market activity is light. Many loathe the low volume in August, and volume should pickup following Labor Day. Other respected technicians suggest that in uptrends (which we are still a part of until broken), support is not far away from what is often the pullback low. Sharp market pullbacks, like first experienced on August 1 and again on August 14, often need time to “re-test”. Technicians look for a “bang” (selloff with high volume) and then “whimper” (retest or even slightly lower low but on light volume) to suggest that selling pressure is drying up and the stressful period might be near an end. Friday has some characteristics of a “whimper” retest. Still, we remain of perspective that the risks to the economy are not insignificant and the cycle is long – our more cautious focus on quality and defense will remain in place at this stage.