Economic and Stock Market Commentary 09/16/19

Alex Ralicki |

The trade dispute between the United States and China remains on the front burner, with stocks moving up on any new hints of a thaw in the contentious relationship between the two economic powers, or down upon signs of escalating tensions. So when the current month began, and new tariffs were implemented, stocks sold off. However, equities turned higher when the parties announced plans to resume talks in October. Encouragingly, constructive news on the trade front is becoming more prevalent, which explains the recent upward trend in equity prices.

Meanwhile, the economy is performing unevenly, as summer ends and fall begins. To wit, August brought disquieting news on manufacturing, with that sector’s first contraction in three years. On the other hand, the non-manufacturing sector saw surprising strength, with activity, which is less sensitive to global trade winds, advancing at its best pace since May. At the same time, job growth was mildly disappointing last month, but both the labor-force participation rate and average hourly wages ticked higher, while the jobless rate held near a half-century low.

Global trends are more up in the air, with economic growth (including manufacturing) continuing to weaken offshore (especially in Europe, where interest rates recently were cut); trade uncertainty still in place; and the Brexit crisis ever-more threatening. For now, our economy remains resilient, and expectations are that the expansion will remain in place over the next year or two. Still, there is less margin for error than there was earlier, when growth was more formidable. Clearly,

The case for additional Federal Reserve action on interest rates is strengthening. Indeed, the Fed likely voted to reduce interest rates at its latest meeting (which took place after we went to press). A follow-up rate reduction late this year also could be in the works, especially if international waters become more troubled or domestic activity starts to slow further.

Through it all, stocks are pressing higher, with the reversals of August giving way to smoother sailing thus far in September. Cautious optimism on trade and expectations of lower interest rates to come likely explain this uptrend.

Conclusion: We think investors would be well served by taking a constructive view of the stock market.