August 2019 Market Commentary

Equity markets declined in August as a rush of negative headlines led to a risk-off attitude for the month. Aside from the now commonplace hand-wringing over trade wars and other global geopolitical concerns, worries arose over the potential recession implications of an inverted yield curve (when long-term interest rates fall below short-term rates). For our primer on the yield curve and its investment implication, please check out our blog post, “The Inverted Yield Curve”.

In response to these and other concerns, the US stock market declined by -2.0% in August as measured by the Russell 3000 index, though year-to-date performance remains strong at +18.0%. International stocks saw a -3.3% decline for the month per the MSCI ACWI ex-US index, which is up +6.4% YTD. On the other hand, defensive assets benefited from the risk-off trade. The Bloomberg Barclays US Aggregate Bond Index gained +2.6% on the month and is up +9.1% YTD, as bond prices have benefited from falling interest rates. Similarly, gold prices rallied +7.1% in August and have gained +19.3% on the year, surpassing $1,500/oz. for the first time since 2013. A balanced portfolio, composed of 60% in global equities and 40% in fixed income, would have declined -0.4% in August, and year-to-date would be up roughly +12.5%.

Rather than allowing the headlines to shape our investment thesis, Archetype relies on our data-driven Three Dials approach to inform our outlook. Below is a primer on where each of these dials stand through the end of August.                                                                                  

1. Market Sentiment and Momentum: Positive (unchanged from last month)

Despite a sell-off at the beginning of the month, major market indexes found support as buyers stepped in to prevent significant losses. Our technical analysis shows that equities remain in an uptrend for the time being, and as such our Momentum Dial shows a “positive” reading.

2. Economic Fundamentals: Positive (unchanged from last month)

As expected, Q2 GDP in the US was revised downward from a +2.1% annualized rate to +2.0%, with the most recent ISM survey pointing to a slowdown in manufacturing. On the plus side, consumer spending surprised to the upside in July, while financial conditions remain accommodative as the Fed prepares to support continued growth through lower interest rates. While growth may be slowing both at home and abroad, economic fundamentals remain strong enough for this dial to remain in a “positive” position as of month-end.

3. Valuation: Negative (unchanged from last month)

Valuation remains a moderating force for us. When paying for fixed (albeit unknown) future cash flows, paying a higher price now demands a lower return on investment in the future, and we view equity prices as elevated compared to historical norms based on several metrics. As such, our Valuation Dial continues to show a “negative” reading.

On a composite basis, our “Three Dials” paint a cautiously optimistic picture of the investment landscape, though we are closely monitoring any future developments.

Sources:

https://www.cnbc.com/2019/08/29/us-gdp-q2-second-reading-up-2point0percent-in-line-with-expectations.html

https://www.cnbc.com/2019/08/30/us-consumer-spending-increases-solidly-income-tepid.html

https://www.nytimes.com/2019/09/03/business/economy/manufacturing-economy-slowdown.html