US equities bounced off some key support levels late last week. However, the S&P 500 still closed down for the month and It took all of August to digest a nasty sell-off that hit the first few days. Sector performance continues to show a move to safer sectors such as Utilities and Consumer Staples, while precious metals and bonds took center stage.
The trade war with China continues to peculate with new tariffs starting today, while Brexit looms over the EU. Furthermore, global trade continues to shrink and Germany (generally a strong economy and considered a lead indicator) could already be a recession, driving global interest rates even lower. On Sunday morning, China retaliated and imposed additional tariffs on 75 billion dollars worth of goods mostly manufactured in the US heartland. The rate drops are occurring despite so much sovereign debt already with negative yield. Don’t get too depressed as things are not all bad as Leading economic indicators for the US are still strong, contradicting the inverted yield curve that usually happens about 1 year before a recession.
Bonds, Silver, Gold and Gold miners led all other asset categories in August and over the past 6 months . Most noteworthy is that silver was up almost 5% on the week and now leading Gold shorter term. The strongest most persistent rallies in precious metals occur when silver leads gold to the upside. One thing that is very different from the 1970’s bear markets in equities was that inflation ruled which included oil and soft commodities, which are currently lagging badly. In fact soft commodities are sitting at 100 year lows relative to equities.
This week’s highlights are:
- Risk Gauges improved from 100 % bearish and are back in neutral territory
- Defensive Sectors such as Utilities and Consumer Staples outperformed last month
- US long bonds (TLT) have rallied 23% over the last 6 months
- Semis (SMH) and the Transports (IYT) held up and are leading sectors
- Russell 2000 (IWM) remains in a defensive distribution phase
Last week, as long bond yields dropped to below 2%, US Treasury Secretary Steven Mnuchin indicated that he is looking at issuing 100-year bonds which from this vantage point seems like a great idea. The US could roll a lot of its short-term higher interest rate debt into 100-year bonds and avoid short term refinancing issues which could certainly crop up.
On a final note, keep your stops in place as September is usually a tough month for stocks and on average down about -.5%.