They say bull markets climb a wall of worry.
Investopedia’s Will Kenton explained the idea like this:
“…a bull market isn’t a peaceful place. When times are good, investors are constantly tense, wondering how long they will keep rolling, fretting about when a seemingly inevitable correction will finally put a stop to the market elation. As a market continues ascending, the decision can become increasingly agonizing whether to take profits in a position or let it ride.”
Last week, the wall of worry gained a few feet.
The University of Michigan Surveys of Consumers indicated confidence improved in September, which appeared to be positive news. However, the report suggested positive sentiment is eroding. “More consumers reported unfavorable news about the economy in September than in eight years since September 2011. While a good share of the news involved tariffs and other economic policies, there were nearly as many reports on job losses as job gains.”
Reports the administration is considering ways to limit investment in China had investors concerned about possible portfolio repercussions. The steps being considered include regulating U.S. government pensions’ exposure to Chinese stocks, regulating stock indices’ allocations to Chinese holdings, and delisting Chinese shares from U.S. stock exchanges, reported Bloomberg.
The Federal Reserve’s daily liquidity injections into the repurchase agreement market, which underpins U.S. money markets, were a source of concern for some. The Economist reported, “Market-watchers blamed the cash crunch on firms’ need to pay corporate-tax bills at the same time as sucking up more new government debt than usual. But banks were aware of these factors well ahead of time. Other, as yet poorly understood, forces seemed to have provided the nudge that tipped repo markets into disarray.”
The announcement of a Presidential impeachment inquiry was big news that had a relatively small affect on U.S. stock markets last week.
Major U.S. stock indices finished the week lower.
There’s a new theory in town.
Renowned economist Robert Shiller’s new book suggests investors may be able to predict and prepare for economic events by tracking popular stories.
Applying the theory might have been a challenge last week. There were so many stories with potential to move markets and affect the economy it was difficult to guess which would be the most influential.
In the end, on-again-off-again trade negotiations provided the spark that drove markets lower. Barron’s explained:
“The S&P 500 would have finished flat for the week – except it decided to drop 0.5 percent after reports that China had canceled a visit to Montana hit the newswires…That’s not what we would have expected, given all of the week’s excitement. Saudi Arabia’s oil infrastructure was attacked. The Federal Reserve cut interest rates by a quarter-point. U.S. money markets went crazy and forced the Fed to intervene, setting off comparisons to the collapse of Lehman Brothers in 2008. And, yet, a Montana junket was the ultimate determinant of whether the market finished up or down.”
On Saturday, reports from U.S. trade representatives and China’s state-run news agency emphasized trade discussions were ‘constructive’ and ‘productive’ and would continue in October, reported The New York Times.
Last week, Federal Reserve Chair Jerome Powell mentioned trade wars 20 times in his news conference, reported The Wall Street Journal. “Other geopolitical risks figured less prominently or not at all. Mr. Powell mentioned Brexit once, and tensions in Hong Kong and Saudi Arabia didn’t come up.”
The Fed chair emphasized the Fed is using the tools at its disposal to support demand and counteract economic weakness. However, it has no way to resolve trade issues. He pointed out uncertainty about trade has reduced business investment across the United States and could hurt economic growth.
Until an agreement is reached, stories told about U.S.-China trade issues are likely to remain influential.
If you enjoy searching for Waldo, the visual nemesis in a red-striped sweater and cap, you may appreciate the quandary of central bankers in many wealthy nations. For almost a decade, they’ve been they’ve been trying to find inflation.
Last week, there were reports of a sighting in the United States.
The core U.S. Consumer Price Index (CPI) measures changes in the prices Americans pay for goods. The Index rose 0.3 percent from July to August. It was up 2.4 percent year-to-year, reflecting the fastest annual growth rate since July 2018, reported The Wall Street Journal.
Rising healthcare costs were one reason for inflation gains, reported CNBC. In addition, Axios reported:
“The costs of the U.S. tariffs on Chinese imports clearly made an impact on the [inflation] reading, but wages also picked up notably last month as seen in the government's jobs report. The reading may indicate that inflation is making a sustained comeback.”
Central banks don’t want inflation to be too high, as it has been in Argentina (22.4 percent year-to-date). They also don’t want it to be too low, because low inflation can be a sign of economic weakness.
The Federal Reserve (Fed), which is our central bank, considers 2 percent inflation to be consistent with a healthy economy, reported The Wall Street Journal.
If you were reading carefully, you may have noted the CPI was above 2 percent. While the CPI measures inflation, it’s not the Fed’s favorite inflation gauge. Fed officials prefer the Personal Consumption and Expenditures Price Index (PCE), which estimated inflation at 1.4 percent in July. The PCE was up 0.2 percent for the month.
U.S. stocks moved higher again last week on solid retail sales and positive trade news.
Remember the movie Groundhog Day?
Bill Murray’s character is a crotchety newsman who lives the same day over and over again. After exhausting other options, he chooses self-improvement and eventually escapes the cycle.
The movie came to mind last week when the United States and China headed to the negotiating table. Again.
Global stocks rallied on the news. Again.
The U.S.-China trade war has had a significant impact on stock market performance during the past two years. Since the trade war began, U.S. stock markets have rallied when trade talks are announced and retreated when trade talks fail. In 2018, MarketWatch reported:
“Trade issues have been at the center of Wall Street’s concerns because they have the potential to ripple into every other issue that has been besieging investors, if [the trade war] escalates. That includes the growth outlook for U.S. corporations, an economic slowdown in China, the pace of rate hikes, and the health of the U.S. economy and stock market…”
Last week, Fox News pointed out U.S. companies and consumers are feeling the effects of tariffs and that could be detrimental to U.S. economic growth, especially if consumer spending slows.
Regardless, major U.S. indices posted gains last week after the United States and China agreed to a new round of trade talks. Ben Levisohn of Barron’s explained:
“Why did the market soar? Not because of the economic data, which still paints the picture of a decelerating U.S. economy. August’s payrolls report came in light, and would have been even worse if not for a big boost from census hiring. The Institute for Supply Management’s manufacturing index fell below 50, signaling a full-blown contraction in industrial activity. But the United States and China finally set a date to go back to the bargaining table on trade – and that was more than enough good news to last the week.”
Maybe, this time around, trade talks will deliver a trade agreement.
If not, be prepared for more possible volatility.
What, me worry?
About this time last year, Time Magazine reported on anxiety in America. Almost 40 percent of Americans reported being more anxious than they were the previous year.
The performance of stock and bond markets this summer may have pushed those numbers higher.
Last week finally brought some relief. It was the best week for major U.S. stock indices since June. The Standard & Poor’s 500 Index, Dow Jones Industrial Average, and Nasdaq Composite all gained between 2 and 3 percent, reported Ben Levisohn of Barron’s.
How can investors cope if volatility continues?
Barron’s Randall Forsyth offered a recommendation, “When the stock market is this crazy, you should just invest lazy.” It’s important to note that Forsyth’s definition of ‘managing lazy’ is building a diversified portfolio aimed at achieving your financial goals and leaving it alone.
Marketplace’s Andie Corban and Kai Ryssdal offered a pretty good argument for lazy investing, too. In the audio report, Ryssdal discussed trading algorithms with Joe Gits of Social Market Analytics:
“Gits: So these [algorithms] are reading the president’s tweet using natural language processing [NLP], and our current president’s tweets are pretty easy to read with NLP, and they are either going long or going short.
Ryssdal: I’m going to ask you to make a value judgment here, then. Entirely apart from making money, are these algorithms – and the outsized effect that they have on movement of the markets – are they a good thing or a bad thing?
Gits: I think they’re a bad thing in general, because I think the volatility causes a lot of panic by buying and selling and I think the average investor gets hurt.”
Staying calm in the face of volatility isn’t easy, but it’s an important skill for investors to hone. If it helps, remember volatility can be computer-driven.