Suffice to say that American investors and corporations should brace for a more prolonged trade war.

Our Top Market Takeaways for the week ending August 30, 2019.

Markets in a minute

So long, summer

Say it ain’t so! On Monday, we will celebrate Labor Day. The holiday, while historically a celebration of workers in the United States, is important for many reasons. It marks the last weekend of summer (culturally, if not celestially), signals the start of school, kicks off football season, and ends our window for wearing white pants to work. As always, it feels like the summer went by way too quickly. But whew, a lot of notable things happened in the investment backdrop between Memorial Day and now. In lieu of making you an end-of-summer scrapbook (because we’re not that crafty), we put together a list of what we think were the top five highlights in markets of summer 2019:

1.    The best of times, the worst of times. Summer brought us both the best and the worst week for the S&P 500 this year. In the week ending June 7, the index popped +4.4% in response to Fed Chairman Powell foreshadowing the rate cut that would come on July 31. But it was Powell’s hawkish press conference that accompanied that rate cut, combined with a tweet announcing new tariffs on China, that made for the worst week of the year: The S&P 500 fell -3.1% in the week ending August 2.

2.    Speaking of that July rate cut, it was a big deal! It was the first time the Fed cut interest rates since the Bush Administration. Central banks around the world joined the policy easing party, too. Nearly every major central bank on the globe has stopped tightening policy and is now either easing or on hold. For comparison, only three countries (Brazil, Colombia and Peru) were easing in 2018.

3.    Yields took a tumble. This one might seem obvious, given the previous point, but the moves in interest rates have been meaningful. Yields on both the 10-year and 30-year U.S. Treasuries have plummeted around -80bps this summer, and the latter fell below 2.0% for the first time ever. The decline in interest rates caused the now infamous 2-year–10-year yield curve to invert, which has historically been an indicator that a “recession” is right around the corner (but we don’t think that’s the case this time—click here for our take).

All that glitters is gold. Prices of the precious metal pushed higher and higher, gaining about +20% since Memorial Day. What’s to thank for the rally? The drop in interest rates for one, since lower yields make for a lower opportunity cost of holding assets like gold. And, of course, ongoing worries about the global growth slowdown and trade wars pushed anxious investors into the commodity, which is widely considered a safe haven asset.

Line chart shows gold (USD per ounce) from May 25, 2019, to August 29, 2019. During this time period, the line increased and is currently at its highest level.

5.    Trade wars brought the heat. Our list wouldn’t be complete without a spotlight on the trade beef between the United States and China—oh, the drama! We entered the summer with tensions running high. New tariffs from both sides took effect as May turned to June. Investors anxiously awaited the meeting between Trump and Xi at this summer’s G20 summit, the outcome of which turned out to be a tariff truce. That didn’t last long. China and the United States have since traded a series of jabs at each other, through tariffs and other means (such as the symbolically significant depreciation of the Chinese yuan, the addition of more than 40 Chinese companies to the U.S. trade blacklist, and so on). The path forward remains unclear, and we view the possibility of a resolution in the next year as unlikely. Suffice to say that American investors and corporations should brace for a more prolonged trade war and the anxiety that comes with it.

Considering the list above, you might think that safe haven assets were the only ones that had some summer fun. However, since Memorial Day, the S&P 500 actually returned over +3.5% (with the technology sector returning over +8.5%). In the same vein, the labor market has also remained resilient. Despite all the consternation around trade wars, yield curves and recessions, there don’t seem to be many indications that businesses are laying off workers. Given that Monday is a celebration of labor, here’s a highlight reel of today’s American worker.

Spotlight

Labor stats for Labor Day

So, how you doin’, workers? Let’s take a look.

  • Still flexin’. Overall, the U.S. labor market is pretty healthy. The unemployment rate (the most common measure of the job market’s health) is the lowest it has been since the late 1960s.
  • Busy bees. While economists often lament the low growth rate in productivity (or output per hour worked), it should be noted that the average American worker has never been more productive than they are today.  
  • More folks punching the clock. Over the last 12 months, the U.S. economy has added ~2.25 million jobs. Of those, 1.8 million are related to services sectors such as retail trade, healthcare, leisure and hospitality, and education. The rest are from goods-producing sectors like mining, manufacturing, and construction.

Line chart compares the 12-month moving total change in employment for services sectors and the goods-producing sectors from 1990 to 2019. The chart shows that in the last 12 months, the services line has exceeded the goods line, highlighting that most additional jobs are related to the services sectors.
  • From mines to malls. Currently, only 16.4% of American workers are employed in those goods-producing industries we mentioned. In 1979 (at the nominal peak), it was close to 35%.
  • State of the union[s]. Another staggering decline has been in labor union membership (i.e., those we have to thank for the long weekend). In 1954, almost one out of every three workers was a union member. Today, only one in 10 workers belong to a labor union.
  • So what exactly do you do? The data on employment is breathtakingly specific. For example, 5.2 million Americans work in hospitals, 960,000 work at gas stations, over 750,000 are couriers and messengers, 520,000 are performing artists and athletes, and 175,000 work in museums, historical sites, zoos and parks.
  • Show me the money. Wages (as measured by average hourly earnings) are now rising at around 3% each year—around the strongest pace since the Global Financial Crisis.

Have a safe and happy Labor Day!

All market and economic data as of August 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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