US stocks broke a multi-week winning streak, but did so with very “sleepy” daily moves. For the week ending September 20, the S&P500 gave up -0.5%, but remains +2.4% higher for the month. International markets also slipped, but likewise were controlled in their daily moves. Whereas the month of August was an alarmingly volatile period with 18 of the 22 trading days experiencing moves greater than ±1%, the S&P500 has closed up or down by less than 0.75% in each of the past 12 sessions – the longest such streak since the end of July. Such streaks appear common in 2019 when investors look uncertain about the direction of the global economic outlook.
Despite what the low volatility of the week might suggest, there were some very important events. As noted in last week’s summary, we entered the week with oil prices spiking by almost 15% on news that production facilities in Saudi Arabia were attacked causing the worst-ever sudden disruption to the world’s oil supply. The US Federal Reserve cut its target interest rate by another quarter percentage point (widely anticipated) and seemed to strike a good balance in its accompanying statement and avoid catching any market participants by surprise. Maybe most surprising however was how little stir was created by a “breakdown” in the US overnight repo market that required cash infusions totaling more than $200 billion by the Fed in just 3 days last week. Without going too technical, the development could reawaken some uncomfortable memories of the financial crisis 11 years ago, but investors are apparently choosing to look past because the squeeze is more a function of what many argue are overly tight banking regulations and a surge in treasury issuance as compared to the financial crisis when bank failures and an erosion of trust/confidence in counter-parties was the backdrop.
Notable headlines aside, economic data appears to be the only focus of investors at the moment. It is presently difficult to discern whether the summer softness will intensify or if there are glimmers of improvement (particularly domestic) starting to take shape fueled by a renewed commitment from central banks to provide monetary accommodation, and politicians (US/China in particular) to be more collaborative on the terms of trade. As the final quarter of 2019 approaches, it appears the year will be one in which the stock market dramatically outperforms the economy – a notable contrast from 2018 where the economy was remarkably strong, but financial assets offered no resemblance. With an election in 2020 and uncertainty likely to remain elevated on so many fronts, it seems likely financial markets as a whole will remain stuck in a relatively tight range. But with the Fed and others again sensitive to a slower-than-desired economic outlook, the money supply appears to be increasing again. With business leaders still cautious and handcuffed to deploy liquidity into global supply chains or investment on trade uncertainty, that money may be more likely to find its way into financial assets (stocks, bonds, etc) – there is strong historical correlation. With bonds expensive (low yielding) the TINA factor (There Is No Alternative… for growth AND yield than stocks) seems again valid.