Following the roughest week for Treasuries in three years, the sharpest style rotation for a decade in equity markets, and a controversial re-start of the European Central Bank’s asset purchase program, market participants went into last weekend hoping for a breather.
No such luck.
A second Federal Reserve rate cut became a sideshow as an attack in Saudi Arabia caused the worst-ever sudden disruption to the world’s oil supply, and a breakdown in the U.S. overnight repo market reawakened uncomfortable memories of the financial crisis 11 years ago.
And yet, as in the previous week, the response of equity investors was to shrug and push the S&P 500 over 3,000.
It is worth taking a step back to think about that.
The Fed decision itself, together with its marginally hawkish statement and “dot plot,” might have tripped markets up a few short months ago. Equities shed their concerns within hours.
Saturday’s attacks were not only an unprecedented disruption to oil supplies, but a kick to a geopolitical hornets’ nest. Brent oil futures saw the biggest intraday leap in their 31-year history when Monday opened. WTI contracts were up more than 15%. If sustained, that would have taken billions of dollars out of shoppers’ pockets at a time when the global economy is almost entirely reliant on the consumer.
The spike in the U.S. overnight repo rate into double figures on Tuesday also took us into virtually unheard-of territory. In its first overnight repo market operations since the financial crisis, the Fed stepped in to restore calm with more than $200 billion of liquidity over three days.
Either one of those two events would have reverberated through equity markets at any other time over the past 40 years. Instead, we see relative calm at the index level—and a rotation into smaller companies, value stocks and cyclical sectors underneath the surface.
Are investors being impressively resilient, or heedlessly reckless?
Those in the resiliency camp would point to the speed with which oil supplies were re-established and the capacity of a post-crisis Fed to expand its balance sheet should stress persist in overnight funding markets.
They would note the stabilizing picture in the U.S. economy reflected in the relatively strong U.S. retail sales data for July and August, as well as positive news on jobless claims and consumer borrowing. They might argue that the controversy around the ECB’s actions is a prelude to much-needed fiscal loosening in core euro zone countries, hints of which have been heard from Germany and the Netherlands.
On balance, we are in that camp.
But we would also caution against letting resiliency slip into complacency. After all, activity in much of the world outside the U.S. remains challenged, and the U.S. itself has not been exempt from the slump in global manufacturing.
Meanwhile, the clamor of a U.S. presidential election is just coming into earshot. Even before we start the wide-open battle for the White House and both houses of Congress, we will get a bruising process to select a Democratic candidate.
The election process could weigh on sectors perceived to be at regulatory risk, such as health care and technology, and discourage an industrial sector that is already reluctant to invest. There’s a reason why 150 years of history tell us that a recession is almost twice as likely in the year after a U.S. presidential election than one would expect were the business cycle not linked to the political cycle.
There are sound reasons for investors’ resilience over the past few, rocky weeks and months. There are equally sound reasons to anticipate more rockiness moving into 2020.
In Case You Missed It
- NAHB Housing Market Index: +1 to 68 in September
- U.S. Housing Starts: +12.3% to SAAR of 1.36 million units in August
- U.S. Building Permits: +7.7% to SAAR of 1.42 million units in August
- Federal Open Market Committee Meeting: The FOMC lowered the target range for the fed funds rate by 25 bps to 1.75% – 2.00%
- Bank of Japan Meeting: The central bank left monetary policy unchanged
- U.S. Existing Home Sales: +1.3% to SAAR of 5.49 million units in August
- Japan Core Consumer Price Index: +0.5% year-over-year
What to Watch For
- Monday, 9/23:
- U.S. Purchasing Managers’ Index
- Euro Zone Purchasing Managers’ Index
- Japan Purchasing Managers’ Index
- Tuesday, 9/24:
- S&P Case-Shiller Home Price Index
- U.S. Consumer Confidence
- Wednesday, 9/25:
- U.S. New Home Sales
- Thursday, 9/26:
- U.S. 2Q 2019 GDP (Final)
- Friday, 9/27:
- U.S. Durable Goods Orders
- U.S. Personal Income and Outlays
Statistics on the Current State of the Market – as of September 20, 2019
|S&P 500 Index||-0.5%||2.4%||21.1%|
|Russell 1000 Index||-0.4%||2.3%||21.2%|
|Russell 1000 Growth Index||-0.3%||0.8%||24.3%|
|Russell 1000 Value Index||-0.6%||3.9%||18.2%|
|Russell 2000 Index||-1.1%||4.4%||16.8%|
|MSCI World Index||-0.4%||2.9%||19.0%|
|MSCI EAFE Index||-0.3%||3.9%||14.4%|
|MSCI Emerging Markets Index||-0.5%||3.9%||8.3%|
|STOXX Europe 600||-0.3%||3.6%||15.0%|
|FTSE 100 Index||-0.3%||2.1%||13.3%|
|CSI 300 Index||-0.9%||3.7%||33.7%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.2%||-0.3%||2.8%|
|Citigroup 10-Year Treasury Index||1.4%||-2.1%||10.0%|
|Bloomberg Barclays Municipal Bond Index||0.1%||-1.1%||6.4%|
|Bloomberg Barclays US Aggregate Bond Index||0.9%||-0.9%||8.1%|
|Bloomberg Barclays Global Aggregate Index||0.5%||-1.0%||6.3%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.1%||0.7%||8.3%|
|ICE BofA Merrill Lynch U.S. High Yield Index||0.3%||0.7%||11.9%|
|ICE BofA Merrill Lynch Global High Yield Index||0.1%||0.8%||10.5%|
|JP Morgan EMBI Global Diversified Index||0.7%||0.1%||13.6%|
|JP Morgan GBI-EM Global Diversified Index||-0.8%||1.5%||8.4%|
|U.S. Dollar per British Pounds||0.4%||2.7%||-1.8%|
|U.S. Dollar per Euro||-0.7%||0.0%||-3.7%|
|U.S. Dollar per Japanese Yen||0.2%||-1.6%||1.7%|
|Real & Alternative Assets|
|Alerian MLP Index||1.2%||4.0%||14.7%|
|FTSE EPRA/NAREIT North America Index||1.6%||1.6%||24.1%|
|FTSE EPRA/NAREIT Global Index||0.8%||1.7%||18.6%|
|Bloomberg Commodity Index||0.7%||3.0%||5.0%|
|Gold (NYM $/ozt) Continuous Future||1.0%||-0.9%||18.2%|
|Crude Oil (NYM $/bbl) Continuous Future||5.9%||5.4%||27.9%|
Source: FactSet, Neuberger Berman.