Hurricane Harvey only grazed San Antonio, but other areas of the state are dealing with massive flooding and the ancillary problems it creates. Our thoughts and prayers are with those impacted by Harvey and the first responders who are trying to help them.
Equity markets bobbed and weaved, but ended the week looking more like undefeated boxing champion Floyd Mayweather than his over-matched opponent Connor McGregor. Jabbed by rumors that Gary Cohn (White House Economic Council Director and the presumptive next Fed Chair) would resign and President Trump’s threat to shut down the government if Congress doesn’t approve funding for The Wall, investors countered on hopes that a tax reform package will be completed before the end of the year and that the debt ceiling will be raised in September. Domestic large cap equities gained 0.8% on the week, though they remain underwater on the month down about 1%. Small cap stocks posted a 1.5% gain on the week, but are still down 3.3% in August. International equities also posted gains for the week, though Emerging and Frontier Market indexes led the way rising 2.2% and 1.3% respectively vs. 0.2% for Developed ex-US stocks. The yields on U.S. Treasuries declined as Fed Chair Yellen offered no new information regarding monetary policy in her speech at Jackson Hole (the USD also declined, described further below). Precious metals rose 0.6% and gold is now up 12.5% YTD. WTI Crude slid 1.3% to $47.87 per barrel.
For a detailed view of weekly, month-to-date and year-to-date asset class performance please click here.
Yellen’s Swan Song? – Last week global central bankers gathered in Jackson Hole for the annual Economic Symposium. The event began in 1978 as a forum for the world’s monetary policy makers to gather and discuss important issues they are facing behind closed doors and away from the political spotlight of their everyday workings. However, the event has evolved and now serves as an important platform for major bankers to signal future policy intentions. Encouraging the dissemination of information, reporters comprise an increasing proportion of the attendees, swelling from 6% in the early years to more than 12% at this invite-only event. Probably the most memorable policy announcement from Jackson Hole came in 2010 as the negative effects of the Financial Crisis were reverberating around the world. At that event, Fed Chairman Ben Bernanke gave a speech in which he said “Should further action prove necessary, (Fed) policy options are available to provide additional stimulus.” This speech served as the preamble to Quantitative Easing II.
This year’s official topic “Fostering a Dynamic Global Economy” was designed to help attendees focus on the sluggish economic growth many countries have experienced since the financial crash of 2008. Investors anticipated that Fed Chair Yellen may drop some hawkish policy hints, but her speech sounded more like someone who knows her time in the role is fleeting. She used her stretch at the podium to recap the Financial Crisis and defend the Fed’s monetary response. Chair Yellen closed on an optimistic note, suggesting the Fed can use these same monetary tools to prevent another financial calamity. The next headline speaker, ECB President Mario Draghi, also kept his cards close to the vest. Many were hoping he would provide details about the next steps for monetary policy in the Euro Zone, but the closest he got was to remark that making adjustments to monetary policy are “never easy”.
As the chart below highlights, the USD moved sharply lower following each of the speeches by Yellen and Draghi, reinforcing a trend that began at the start of 2017.
Sources: Bloomberg and Covenant Investment Research
Thus far this year, the U.S. dollar has declined 9.5% against a basket of trading partner currencies and more than 11% vs. the Euro specifically. A weaker U.S. dollar is not all bad as it makes U.S. exports more competitive and can help boost sales for companies like those in the S&P 500 that collectively derive more than 40% of their revenue from overseas sources.
In sum, Jackson Hole was a bit of a snooze fest and the U.S. dollar declined as a result. Hopefully, the bankers made progress with their ideas for how to boost global economic growth in their meetings behind closed doors.
The Big 2 – As members of Congress finish up their summer vacations and prepare to return to Washington, September 29th is likely circled with a big red marker on their calendars. On this date two important deadlines are converging:
- Debt Ceiling: The Treasury needs Congress to approve raising the debt ceiling so the Treasury can borrow money and continue to fund programs and services such as social security, Medicare, Medicaid, and the military.
- 2018 Budget Approval: The government’s fiscal year begins on October 1st. The budget is necessary as it authorizes levels of government spending and where the dollars are directed.
Most remember the last government shutdown, when Congressional infighting prevented a budget agreement in 2013. As the deadline approached and ultimately was breached, stock market volatility increased and the S&P 500 ultimately sold off by 4% over a two-week period. Congress eventually came to their senses to pass a budget and some have suggested that the falling equity market played a role. Even as political strife has increased since 2013, odds are that deals will get done this year (the political ramifications of a government shutdown would be very costly). But the twists and turns leading to their resolution will cause stock market volatility to rise if we get close to September 29th without a resolution on these two fronts. Then again, equity volatility may be a necessary catalyst for the deeply entrenched politicians in Congress to act.