Thrive Weekly Economic Update – September 23rd, 2019

U.S. MARKETS DOWN AS THE FED CUTS RATES, GM STRIKES AND THE WORLD DIGESTS THE ATTACKS ON SAUDI ARABIA

  • U.S. stocks finished slightly lower last week after three consecutive weeks of gains whereas stocks overseas pulled back significantly
  • The DJIA fell 1% and below that 27,000–threshold, whereas the S&P 500 and NASDAQ dropped 0.5% and 0.7%, respectively
  • The MSCI EAFE Index, a proxy for large–cap, developed, international markets, pulled back 3% on the week
  • The three events that were in the news the most were the attacks on Saudi Arabia’s key oil infrastructure, the GM strike and the decision of the Federal Reserve to cut rates by 25 basis points
  • The drone and missile attacks on Saudi Arabia’s oil infrastructure occurred over the weekend and impacted at least 5% of the world’s production, causing oil prices to skyrocket 15% early in the week, before settling back down to a week’s gain of about 6%
  • Precisely at midnight on Monday, approximately 46,000 General Motors workers went on strike, effectively halting GM’s production in the United States
  • The last GM strike happened in 2007, a full year before the U.S. government bailed out the auto industry and before the global financial crisis was at its worst
  • As expected by most, the Federal Reserve’s decided to cut rates for the second time this year as they lowered the federal funds rate by 25 basis points to protect the U.S. economy from trade uncertainties and slower global growth
  • About half of the 11 S&P 500 sectors were red, as Consumer Staples, Communication Services, Industrials, Information Technology and Consumer Discretionary all declined
  • Treasuries declined most of the week, rallied a little on Friday and the 10–year yield closed at 1.72%, down 18 basis points on the week

WEEKLY MARKET PERFORMANCE

DRONE ATTACKS ON SAUDI’S OIL FACILITY

Early in the morning of Saturday, September 14th, there were drone attacks on two major oil facilities in Saudi Arabia. The attacks knocked out more than 5% of the global oil supply as it crippled output from the world’s top exporter.

The attacks saw crude oil surge about 15% on Monday, about as much as it did when Iraq invaded Kuwait before the 1991 Gulf War. Then over the next couple of days, the price of crude dropped after the Saudi government said half of the production that was knocked out had already had been restored.

According to AAA, prices for gasoline in the United States rose nearly 1.5% in the two days following the attacks and the average national price stands at $2.66 per gallon by the end of the week. Worse, energy analysts are forecasting a gain of 10 to 25 cents per gallon in the coming days.

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THE FED CUTS RATES FOR THE SECOND TIME THIS YEAR

On Wednesday, the Federal Reserve voted on a 25 bps fed funds rate cut but it was hardly a unanimous decision. The Fed voted 7–3 in favor of cutting rates, with St. Louis Fed President James Bullard advocating and voting for a 50 basis points cut.

Further, the Fed’s “dot plot” showed that seven out of 17 Fed officials expect that another rate cut will be made in 2019, but the median projection suggests that there will not be any more rate cuts in 2019 or the following year.

Recession-bears keep clamoring that a recession is imminent and the Fed’s decision just gives them more ammunition that a recession is just around the corner. But there are a few macro-economic points that suggest otherwise, especially when one considers the Fed’s dual mandate as outlined by Congress:

“Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates” – what is now commonly referred to as the Fed’s dual mandate.”

In the context of the Fed’s dual mandate, consider that:

  • Unemployment is at 3.7%, one–tenth of a percent from the lowest level in over 50 years. Further, we have seen 107 consecutive months of job growth, the longest streak ever. Finally, wages have risen 3.2% this year, the strongest year in over a decade
  • Inflation has run below the Fed’s intended longer–term 2% target for most of this 10–year expansion and core inflation has averaged 2.1% so far this year. But it’s worth mentioning that the August core CPI reading was 2.4%, the highest it has been in over a year

SECTOR ROTATIONS

Almost half of the 11 S&P 500 sectors ended the week painted red, but YTD every one of them is painted green. And while one week does not make a trend, what is clear is that there has been significant sector rotation when it comes to performance, as evidenced in reviewing this week’s and YTD performance numbers.

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