The Geopolitical Backdrop Remains Highly Fluid – Week Ended 9/13/19

Perhaps it’s just us, but we are struck with how surprised most clients are that the markets are very close to achieving full recovery of their all-time highs set in late-July.  Maybe that’s because the media wasted no time in bringing focus to how adversely financial markets reacted to abrasive tweets (Trade + Fed) from the US President last month; or the reporting that the yield curve inverted – a somewhat technical concept that few mom & pop investors/savers understand beyond being told that it has a decent historical record of signaling economic recession.  The overall mood can at best be described as sober.

After adding +1% last week, the S&P500 is up +2.9% so far in September.  More remarkable however is the areas leading the charge.  For example, bank stocks are up +10% since late-August; momentum indicies (which put their biggest weights in the stocks with the best recent performance) dramatically under-performed.  On those same lines, small-size company stocks shot higher, as did value over growth in the most recent week.  At the same time, treasuries which saw their yields plummet (prices surge) when investors both domestic and foreign flocked to them as a safe-haven, experienced their sharpest sell-off in 3 years, and helped the yield curve flip positive from its worrisome position last month of inversion.  What can we thank for this improvement?  In the most simplistic of terms, it would seem that a more constructive narrative about US-China trade is once again at play.

Entering the 2nd half of September (and the final weeks of 3Q), we are mindful that the theme of US-China trade continues to exact tremendous uncertainty and volatility upon global financial markets.  While talks between US/Chinese leaders are scheduled for early October, we like most are probably skeptical  that a speedy agreement rolling back damage already inflicted can unfold quickly.  At the same time, investors and business leaders just received another obstacle to overcome on their already tall wall of worry: disruption in Saudi Arabia and spike in oil prices over the weekend; this underscores just how tense the geopolitical backdrop is at large.  When stacked with so many uncertainties, higher prices at the pump are harmful to what is appearing an increasingly choppy mood for the US consumer, not to mention the geopolitical uncertainty of war-like conflict.  Oh! – the Federal Reserve meeting is also to occur this week and arguably the most important item for the health of the economy this week.  Yet somehow that item seems far less significant when considering the market views it a virtual certainty another cut of -25bps will be the result.  Compared to items appearing much more fluid, the Fed seems to be a footnote [albeit one that President Trump continues to shoot barbs at via his podium on Twitter].

No matter where you rank the importance of various items this week, there is much to be monitoring with respect to how each item may impact the durability of the recovery and path from here.  As noted in our monthly commentary posted last week, the Geopolitical Landscape remains extremely fluid!

Posted in Blog Post.