Tweet, rinse, repeat: Markets head south in August

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management


Pardon us if this all sounds familiar: A mere three months ago, we wrote about tweets, tariffs, and retaliatory measures that fueled a full-on trade war between the world’s two largest economies and a subsequent market downdraft.

Oops! They did it again.

Students may be shuffling back to school, but the financial markets are reminiscent of last Memorial Day. And while it’s tempting to simply dust off May’s commentary and affix a new month to it, there are some notable differences between then and now—including 10-year Treasury yields that have fallen by 0.50%, and 2-year Treasury yields that are now higher than 10-year yields. This is known as an inverted yield curve, which has historically foreshadowed recession.

It’s been that kind of summer.

US equities

Throughout much of the year, the equity markets have remained resilient in the face of trade disruptions, flagging corporate earnings, and a host of economic warning signs. But to some, August may have seemed like a turning point.

This time around investors took notice when the Treasury yield curve inverted, sending the Dow Jones Industrial Average plummeting by 800 points on August 14 in the largest equity sell-off of the year. Then there was the economic saber rattling between the US and China, which gnawed at corporate profit margins, heightened global growth concerns, and further alarmed investors.

August 2019 US equity performance

FactSet Research Systems

When the dust settled, all but the most defensive sectors were under water for the month, with major indexes stuck at roughly the same levels as a year ago.

August 2019 sector performance

FactSet Research Systems

International equities

International stocks took it on the chin in August, with the escalating trade war disrupting global supply chains and central banks slashing interest rates to stimulate economic growth.

In Europe, industrial production slumped and negative interest rates threatened to destabilize the banking industry. Adding to the uncertainty was newly elected British Prime Minister Boris Johnson, who made no bones about his willingness to crash Great Britain out of the European Union with no deal—with or without Parliament’s blessing.

No region fared worse than Latin America, however, with economic malaise in Brazil, Argentina, and Venezuela taking a toll on equity returns.

August 2019 international equity performance

FactSet Research Systems

Fixed income

The big story in the fixed income markets was the inverted yield curve. The yield spread between 2- and 10-year Treasury notes turned negative on August 14 and continued to widen, with the 10-year Treasury yield briefly dipping below 1.5% and finishing the month at its lowest level since July 2016.

Although the increasingly convex yield curve has spooked investors, fixed income returns were positive across the board in August—reflecting a growing aversion to risk and a flight to historically safe-haven assets.

US Treasury yield curve, August 31, 2019

Source: FactSet Research Systems

Looking ahead

It’s been a volatile summer, and investors are becoming increasingly wary of economic warning signals. But as we close out the third quarter, the news isn’t all bad.

•  Falling rates and the Fed: Fed watching took a breather in August but will be back with a vengeance in September. Investors expect the Federal Reserve to pull the trigger on another 0.25% rate cut later this month, which could add fuel to a solid but decelerating economy and help take the sting out of a trade war that shows no signs of easing.

•  Treasury yield curve: Yes, it’s inverted—which has historically been an early precursor to recession—but the yield curve is only one of many economic indicators. Consumer spending, which is the primary driver of the US economy, has held up well. The housing market, too, could get a boost from lower interest rates. Bottom line: Ignore the yield curve at your own peril, but also realize that it may not carry the same historical predictive powers in today’s low rate environment.

•  Tariffs and trade: With the Trump administration and China locked in a seemingly endless tit-for-tat, the US tariff schedule is starting to resemble a baseball scorecard after an extra-innings marathon. How long this will go on is anybody’s guess, but as we’ve all seen, nothing moves the markets quite like a late-night tweet about trade.

Given all the market noise, it’s important for investors to stay focused on their investment objectives. Opportunities can still be found in beaten-down sectors and international shares, while high-quality bonds have proven to be valuable portfolio stabilizers thus far in 2019. Ultimately, a balanced investment approach may be an investor’s best friend.

Thanks for reading, and we’ll talk to you again next month.

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Mike Loewengart
Vice President, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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