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Market Commentary

August 2019 Market Commentary: Mid-Cycle or Last Stop Before Recession?

Data Source: Bloomberg

August 2019 Highlights:

• Global stocks posted negative returns in August (MSCI All-Country World Index or ACWI down 2.37%).  Major developed markets (MSCI Japan down 1.0%, the S&P 500 down 1.6%, and MSCI Europe down 2.5%) outperformed MSCI Asia Pacific ex Japan and MSCI Emerging Markets, returning -4.4% and -4.9%, respectively.
• Broader Asia continues to bear the brunt from the breakdown in global trade as well as rising escalations between the Chinese government/Hong Kong Governing Authority and pro-democracy protesters. 
• Equity markets partially recovered from the early-month sell-off on renewed prospects for a resolution to U.S./China trade conflicts and a Brexit withdrawal agreement between the U.K. and European Union, despite the looming threat of a Hard Brexit by the 10/31 deadline. 
• Precious metals (GSCI Precious Metals +7.0%) and fixed income (Barclays U.S. Aggregate +2.6%) benefited from investor fatigue over global trade conflicts and contraction in global manufacturing.
• The 10-year U.S. Treasury Yield dropped to 1.50% from 1.87% at the end of July, despite the ‘mid-cycle’ stance communicated by the Fed suggesting further rate cuts are not a slam-dunk guarantee versus what is being priced into Fed Funds futures (1% rate cuts over the next year). 
• Within equities, investors fled into ‘defensive’, lower volatility segments.  U.S. large caps outperformed small caps and growth outperformed value.  Defensive sectors (utilities, real estate, staples) outperformed cyclicals and Minimum Volatility outperformed other risk-based factors.
• Within fixed income, global sovereign debt outperformed all other sectors as $17 trillion of global debt now trades with a negative yield-to-maturity.  U.S. high yield returned 0.4% as higher-risk corporate credit could not keep up with the global bond rally.  However, U.S. credit spreads, outside the energy sector, did not violently react to the looming deflationary environment signaled by the strong rally in global bonds and rate-sensitive asset classes. 
• One can argue that the financial markets, heavily influenced by the rush for safe, positive yields offered by U.S. fixed income, are presenting a distorted picture of how poor the U.S. macro backdrop looks, especially when juxtaposed against reasonably strong U.S. economic data. 
• These technical distortions shouldn’t necessarily preclude the Fed from ignoring deflationary signals generated by the markets, but media-driven, headline-grabbing ‘recession-risk’ signals such as an inverted yield curve need to be viewed within a wider context.

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