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Back from the long weekend, investors were in the mood for some risk taking, thanks to some less threatening talk on the trade front, a benign report on...



Weekly Market Overview | September 9, 2019

September 9, 2019
By Peter Sorrentino, Chief Investment Officer

Domestic Equity Overview:
Back from the long weekend, investors were in the mood for some risk taking, thanks to some less threatening talk on the trade front, a benign report on employment and supportive comments from Federal Reserve Chairman Powell. There was a liquidity bias on the part of investors as witnessed by the 1.8% gain registered by the large cap Russell 1000® Index, versus just a 0.5% gain for the small cap Russell 2000® Index. Thanks to strong gains among Energy (+2.7%) and Finance (+2.3%), value stocks took the week over growth stocks. This is the first time since the last week in May that value has been able to overtake growth.

International Equity Overview:
Currency volatility was again on display last week, this time boosting the returns for both developed and emerging markets. Continental Europe finished the week with roughly a 2.25% gain, while Asian markets took first place with combined gains of 3.75% - this despite weaker export and production data from China. The MSCI EAFE® and Emerging Market indices finished the week up 2.4% and 2.3%, respectively.

US Fixed Income Overview:
Yields on US Treasury obligations added four basis points on the front end and seven at the long end, as buying pressure waned on the recovery in equity prices and the weakening US dollar. There was an increase in supply for both the Municipal and Corporate markets, as issuers sought to capitalize on the recent pull back in yields.

Commodity Overview:
Commodity prices, like stocks, were back in action with the price of crude oil up 3.2%, recovering some of last week’s slide. Industrial metals picked up with copper leading the way on a 3.2% gain. Agricultural prices did not participate last week, as investors continued to struggle with the actual state of US corn and soybean crops. Gold and silver surrendered 1.7% for the week, as fears of wholesale debt monetization ebbed.


Friday's employment report, while below consensus estimate, was not a major negative. The seasonal factors that impacted the August report are often hard to forecast, and last month was the first of several to come that will be adjusted for the hiring of 2020 Census workers. What the market did make note of was the increase in the participation rates, the average work week and average hourly earnings. This report serves to support the view that the US consumer sector remains on solid footing and supportive of the economic outlook. That outlook is key, and as you will see in Exhibit 1, the US equity market is in something of a Goldilocks state - not too expensive, but not cheap. The market decline in the closing months of last year did a great deal to adjust back valuations to be more in line with earnings, and it gave earnings a chance to catch up with valuations. The dividend yield on stocks remains at roughly the same level it has been since 2011, now offering a slight advantage to Treasury's. The price/earnings multiple has cooled from 22 to 18, relieving some of the valuation risk from stock prices. The most concerning chart in Exhibit 1 is the one at the bottom right of the series, which represents the year-over-year change in earnings. As you can see, while absolute earnings are at record levels, the rate of change is slowing. We have experienced this before in this cycle. The collapse of commodity prices at the end of 2015 and start of 2016 served to pull the Energy and Materials sectors into the red. The market managed to look through the storm, and the advance held together. The year 2020 looks to be another test; therefore, the health of the consumer is critical.

 

Stock Market Information

Exhibit 1 (Source: Crandall, Pierce & Company)

For a PDF version of this publication, click here: 09.09.2019_WeeklyMarketOverview

 

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