All our recaps here at are of course critical to all our lives.  But this week’s is extremely critical.  Please read on…

This was yet another volatile week for the market – four of the five sessions saw the major indexes move >1%.  Monday and Tuesday saw somewhat offseting moves in opposite directions (Tuesday’s move was due to Trump backing off tariffs to China until the Christmas season is over), while markets swooned Wednesday to the tune of about 3% down.   A rally Friday saw the markets claw back about half those losses. Until volatility dies down, it is not really too “safe to get back into the water” for those with shorter term horizons.

About that tariff delay:

Products that will not be subject tariffs from September include “cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing,” according to the statement.   The delays mean that goods worth $152 billion, or more than half of the original $300 billion list, will now not be hit with tariffs until mid-December.

“The three-month delay to the imposition of tariffs on more than half of the $300bn of Chinese imports, originally scheduled to take effect next month, is obviously designed to avoid a politically-damaging rise in consumer prices ahead of the holiday season,” said Andrew Hunter, senior U.S. economist, at Capital Economics.

Fun fact:  Goldman Sachs said it now expects a 0.6% drag on the U.S. economy due to trade-war developments, up from its earlier estimate of 0.2%.

Yield curve inversion strikes!  Earlier it was 10 year rate below the 3 month yield which is quite bearish. That caused hand wringing for a bit before “THE FED WILL SAVE US ALL” thinking returned to the market.  This time it was the 10 year yield falling below the 2 year yield.   THIS ONE IS BIG.   “Borrowed time” axiom now is in effect.   NONE of us know what this means for markets because there are so many animal spirits and central bank interventions, but it’s a bad sign for the future economy.  That said the market usually still rises for quite a while before the you know what hits the wall.  But as a participant in the economy it needs to be a part of your financial plan to prepare for a slowdown in the coming 1-2 years.  The Russell 2000 (domestic company heavy) has been showcasing this for a while, as has the housing market which began turning down a year ago as we have outlined.  Global international companies have thus far bucked the trend but the average person is not a global S&P 500 company.

An inverted yield curve often serves as a prelude to a recession because it indicates when monetary policy and financial conditions are too tight for the broader economy. A yield curve inversion along the 2-year/10-year spread has come before the last seven recessions.

Interesting data points:

Even as the 2-year/10-year spread inverts, equities do still have room to run higher.

“After an initial post-inversion dip, the S&P 500 index can rally meaningfully prior to a bigger US recession related drawdown,” BAML strategists said.  When they crunched the numbers, they found that the S&P 500 tended to mount a last-gasp rally, peaking on average 7.3 months after an inversion along the 2-year/10-year spread. (That would be February 2020 ON AVERAGE)

“Research from Credit Suisse says a recession occurs 22 months after an inversion in the two-year/10-year rate curve, on average,”  (That would be June 2021 ON AVERAGE) says Arielle O’Shea, investing and retirement specialist at NerdWallet in Charlottesville, Virginia.   The S&P 500 is up, on average, 12% one year after a 2-10 inversion.  But when a recession did eventually hit, the S&P 500 on average lost around 32% of its value.

Safety sectors tend to come back en vogue (vs risk) when these type of things happen – the 2 main ones are Consumer Staples (think things you have to buy every week/month i.e. detergent, soap) and utilities.  These 2 sectors are starting to fulfill their role.

Compare and contrast to say Industrials and Consumer Discretionary (things I like, but don’t need)

A third week of swooning in 10 year Treasury rates:

In economic retail sales did well at 0.7% vs the 0.3% expected.  Sales soared 2.8% at internet retailers, a gain that may have been tied to Amazon Prime Day and competing sales from rivals.

For the week, the S&P 500 fell 1.03%.

Here is the 5 day weekly intraday chart of the S&P 500 … via Jill Mislinski.

The week ahead..

The next 6-12 months should see a flurry of global central bankers rush to ease in all forms and function.  Markets love that – and usually it leads to rallies.  This has been the case for 30 years and especially the past 10.  So even if you are bearish on the market at any point, just know a central banker is aiming at you to inflate assets as that’s all they know to do nowadays.

Credit rating agency Fitch noted that more than a third of central banks have loosened monetary policy in the past six months.

Speaking of – Jerome Powell hits Jackson Hole Wyoming this week and markets will now be demanding he soothe markets with dovish words.  Just a few weeks ago he called his rate cut a one off, markets were upset.  They immediately demanded a quarter rate hike in September.  Now some are calling for a half rate cut!  I wouldn’t be surprised to see a massive move Thursday one way or the other based on a sentence or two in his speech!

“We’re the only place on the planet now you can get more than a 2% yield among developed countries,” market researcher James Bianco Bianco said. “Powell should probably open the door for the possibility of a 50 basis point cut at the September meeting.”

Index charts:

Short term: A second week in the row the “breakout level” in the S&P 500 served as resistance.

The Russell 2000 range has been broken for the 2nd time since February.

The NYSE McClellan Oscillator is well in the red – caution signs

Long term: a pullback here on the weekly chart but big picture bulls can only be happy.  That said… keep a watch on this long term.

Charts of interest / Big Movers:

Macy’s (M) tumbled Wednesday morning, after the department-store retailer reported second-quarter earnings that badly missed expectations after heavy spring discounting failed to clear inventories and it lowered its outlook.

The Walmart, Amazon, Target economy (and dollar stores) economy carries on as Walmart reported better-than-expected, second-quarter earnings and same-store sales growth, while projecting that it would grow sales at already existing stores by between 2.5% and 3% in 2020.

General Electric (GE) tumbled to a more than six-month low, after a research report from Madoff whistleblower Harry Markopolos posted a research report online accusing the conglomerate of inaccurate and fraudulent filings with regulators.   CEO Larry Culp called the accusation “market manipulation” and bought nearly $2 million worth of the company’s stock, sending shares back up 10% Friday.  I have my popcorn out.

Chinese ecommerce giant Alibaba (BABA) advanced, after reporting fiscal first-quarter results Thursday morning.

Nvidia (NVDA) issued second-quarter earnings after the close Thursday that beat Wall Street expectations for the second quarter. The company surpassed estimates for both earnings and revenue for the quarter following several quarters of weak performance for the company and the chip-making industry more broadly

Have a great week and we’ll see you back here Sunday!

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