Mid-Month Update: Trade Deal Needed to Break Feedback Loop
By: Christopher Mistal
August 15, 2019
One week prior to the beginning of the market’s August’s tumble, we warned that the month was ripe for a seasonal pullback in our August Outlook released on July 25. Even though weakness was sparked by a single tweet about additional tariffs, an event that would have been virtually impossible to predict or forecast, numerous other reasons existed to be more cautious. First off is the tepid historical performance of August and September. The fact that markets have been largely tracking past pre-election year historical performance quite closely and August was a weak spot here to also factored in.
In response to recent market weakness and additional tariffs that would most likely further dampen growth and increase uncertainty, central banks around the globe cut key interest rates. This made U.S. yields (and their relative safety) even more attractive to foreign and domestic investors. This likely pushed the 10-year yield falling below the 2-year yield triggering what many view as a strong indicator of a future recession which only adds to demand for safe-haven assets that drives yields even lower further inverting the yield curve.
That single tweet and the Fed’s recent rate cuts appear to have created a nearly perfect feedback loop that if not corrected quickly could easily continue to pressure markets and accelerate the arrival of an actual recession. Some kind of trade deal with China is needed to break the cycle and set the market free from all the trade uncertainty. It does not need to be a perfect deal any deal would likely be sufficient. Delays in implementing tariffs are not going to cut it forever and sooner rather than later the market is going to get fed up with the on-again/off-again nature of the “talks.”
However, sometime soon we are likely to begin to see some real progress on a trade deal with China. Elections are rapidly approaching and historically recessions and/or economic malaise have not been kind to sitting presidents and/or the incumbent party. Some deal or at least deal framework before the end of the year could give the economy and the market the time it needs to regain firmer footing and restore confidence for the electorate. Until such deal is announced, the market is likely to continue to track the typical pre-election year pattern. More backing and filling accompanied by higher levels of volatility until mid-December.
DJIA Struggling with Support
Following the worst day of the year, DJIA, S&P 500 and NASDAQ finished today mixed. DJIA advanced 0.39%, S&P 500 gained 0.25% and NASDAQ finished slightly lower, off 0.09%. Our favorite technical indicators, Stochastics, relative strength and MACD, are all still negative. DJIA, S&P 500 and NASDAQ all failed to reclaim their respective 50-day moving averages last week and this Tuesday. S&P 500 and NASDAQ are still comfortably above their 200-day moving averages, but DJIA closed below its 200-day moving average for a second day in a row.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Almanac Investor ETF and Stock Portfolios are positioned for the “Worst Months.” Continue to limit new buying, heed stop losses and maintain an overall defensive posture. September’s historical record is similar to August and these months have been taking turns at the bottom of the rankings for decades.