Market News – August 26, 2019

FED CHAIR POWELL OUTLINES ECONOMIC CHALLENGES:  Fed Chair Jerome Powell gave a major policy speech on Friday.  Normally, such a speech would have been the primary market mover of the day, but it was overshadowed by U.S./China trade (see below).  Mr. Powell acknowledged that the general status of the U.S. economy is positive:

“The outlook for the U.S. economy since the start of the year has continued to be a favorable one. Business investment and manufacturing have weakened, but solid job growth and rising wages have been driving robust consumption and supporting moderate growth overall.”

But he also acknowledged some recent challenges that he says the Fed is watching closely, and stated that the Fed will act “as appropriate to sustain the expansion.”

“The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Long-term bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent. Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

(emphasis added).

TENSION INDUCED LOSSES:  With another week of mixed to pretty good economic data, we suffered yet another week of U.S. stock losses due to trade issues.  We were poised for a positive week through Thursday, and stock futures Thursday night into Friday morning looked positive.  Then China rolled out a new plan for tariffs, and President Trump responded by tweeting that ostensibly ordering U.S. companies to seek alternatives to doing business in China.  U.S. companies that manufacture in China had big losses.  Hasbro, Mattel, Advanced Micro Devices and Nvidia all dropped more than 5% on Friday.

NEW HOME SALES DATA COMES IN STRONG:  Annual sales for new homes should be the best year since 2007.  Sales in July were 4.3% higher than one year ago, and year to date, sales are 4.1% higher than 2018 up to this point.

NEW HOME SALES STILL LAG SALES OF EXISTING HOMES:  For many years, sales of new homes and existing homes tracked each other very closely (going back until at least the 1960s).  Then came the Great Recession and the housing bubble, and a “distressing gap” was created between sales of new and existing homes.  There were too many homes for the existing demand, and new homes were not being built.  Although that gap has closed slightly, it remains large because home builders have been concentrating on expensive homes.  If home builders get back into the smaller, less expensive home market, you may see this gap close.

DEFICITS MATTER:  The Congressional Budget Office forecast government debt as a share of the economy will rise from 79% this year to 95% in 2029.  That would be the highest level since just after World War II.  If there is a downturn in our future, and there is always a downturn in our future, the government will have less ammunition to stimulate the economy with deficits already running at these levels.

APOLOGIES TO MILTON:  The Business Roundtable, a group of leaders of some of America’s biggest companies, is changing its statement of the purpose of a corporation.  Its old statement of purpose espoused economist Milton Friedman’s decades-old theory that companies’ only obligation is to maximize value for shareholders.  Now this group is stating that corporate leaders should take into account “all stakeholders” which includes employees, customers and society at large. It is a major philosophical shift for the association, and it remains to be seen how it influences corporate leadership moving forward.

REFERENCES:    

NEW HOME SALES DATA COMES IN STRONG:  https://www.calculatedriskblog.com/2019/08/a-few-comments-on-july-new-home-sales.html
NEW HOME SALES STILL LAG SALES OF EXISTING HOMES: https://www.calculatedriskblog.com/2019/08/a-few-comments-on-july-new-home-sales.html
TENSION INDUCED LOSSES:  https://www.wsj.com/articles/global-stocks-rise-with-all-eyes-on-the-fed-11566547507
FED CHAIR POWELL OUTLINES ECONOMIC CHALLENGES:  https://www.federalreserve.gov/newsevents/speech/powell20190823a.htm
DEFICITS MATTER: https://www.wsj.com/articles/cbo-boosts-10-year-forecasts-for-budget-deficits-by-809-billion-11566399611
APOLOGIES TO MILTON: https://www.wsj.com/articles/business-roundtable-steps-back-from-milton-friedman-theory-11566205200