Global stocks rallied sharply last week and erased much of the decline experienced in August. Economic news was generally in line with recent themes, and the Chinese government’s comments expressing its willingness to negotiate reassured investors. The S&P 500 rose 2.8% last week. Global stocks, represented by the MSCI ACWI index, rose 2%. The Bloomberg BarCap Aggregate Bond Index rose 0.2%.
Key Points for the Week
- Trade rhetoric calmed even as additional tariffs were implemented over the weekend.
- Economic data reinforced the theme of a strong U.S. consumer willing to spend while trade and manufacturing continue to slow.
- Stocks rallied last week as investors focused on the comments from China and positive economic news.
August was volatile but ended up modestly negative for stock investors and euphoric for bond investors. The S&P 500 slid 1.6%, and global stocks trended down 2.4%. Bonds rose 2.6% as the Aggregate Bond Index posted its best monthly return since 2008.
More Bark than Bite
August proved to have more bark than bite. For a month that saw three daily declines of more than 2.5% in the S&P 500, an overall decline of 1.6% seems pretty solid. The performance in August also reinforced a number of important lessons for investors as markets continue to sort out the risks and opportunities available to companies.
Volatility is in the Eye of the Beholder
How often investors look at the performance of their portfolios can affect their perceptions of volatility. In August, half of the 22 trading sessions saw the S&P move by more than 1%. The three declines of 2.5% or more produced a heightened sense of volatility. So did the sharp bounce-backs where gains helped reduce the effect of large declines.
Investors who only look at their statements monthly would see the S&P 500 dropped 1.6% and is up 18.3% so far this year. The short-term volatility disappears, and the drop appears as a slight decline in an otherwise really good year.
Diversification Can Reduce Risk
Bonds have performed extremely well this month and over the last year. When stocks have stumbled, bonds have often moved in the other direction, providing extra cushion from downturns.
Bond investing also presents some challenges to investors who are analyzing the performance of their portfolios. The maturity of bonds has lengthened, interest rates have dropped, and the government has increased its share of the U.S. bond market by issuing more debt. Many investment portfolios have maintained more consistent characteristics. For a fairer comparison, it may make sense to blend cash and bonds together to better gauge the performance of portfolios, including fixed income.
Markets Anticipate Economic Changes
The accompanying chart shows two variations of a widely favored measure of inflation. One of the reasons bonds have performed so well is investors have continued to lower their inflation expectations. Based on forecasts of continued low inflation, investors continue to accept lower interest payments.
The expectation embedded in bonds and parts of the stock market assumes the economy will continue to struggle in coming months as the slowdown from the trade war pressures global markets.
Investment markets have a way of providing lessons to investors. August is the kind of month to learn from. There was more than enough movement to help investors think about their tolerance for risk, but not enough of a decline to leave someone feeling that they missed their chance.
RV sales have expanded to very high levels in recent years as a growing interest in nomadic travel among millennials and retirees and a long economic recovery have supported sales. But shipments to dealers peaked in 2017, fell slightly in 2018, and have dropped more than 20% based on data from July. It may be slowing confidence in the economy has caused individuals to step back from large purchases. Or people may have decided travelling around in narrowly confined quarters has some downsides.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds
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