October 4, 2019
Market action in September mimicked much of what we’d already seen throughout the year, and for the same reasons, too. After approaching the month as cautiously observant, stocks were rocky on the first day of trading as promised trade talks between the U.S. and China were delayed. On September 3, the Institute for Supply Management (ISM) released its newest Report on Business which stated that the Institute’s closely watched Purchasing Manager's Index (PMI) was now at 49.1%. This number represents the first time in three years the PMI has fallen below 50.1 This weakening is a legitimate, front-line reflection of ongoing trade war uncertainty.
Stocks rallied, however, on the 5th after it was announced that the U.S. and China would once again attempt talks in October. On this news, stocks returned to near all-time highs. On September 17, though, the Federal Reserve injected $53 billion into the overnight REPO (i.e. repurchase) market and this move marked the first time in more than a decade the Central Bank had undertaken such action.2 U.S. housing starts rose to a 12-year high with 1,364 thousand new units compared to expectations of 1,250 thousand for the reporting period. 3
New home mortgage applications increased 33% compared to a year ago and, significantly, the most common product type was the 30-year conventional fixed rate mortgage which accounted for 69.3% of loan applications. And, although rates have remained historically low for a very long time, they surged from a 3-year low of 3.49% to 3.73% on September 19.4 All told, this housing action—matched with the increasing credit-worthiness of mortgage applicants—appears to be positive all around for the U.S. economy, especially when taken in the context of 9 major world economies remaining either embroiled in recession or teetering on its brink. Interestingly, household spending, which had grown steadily at 0.5% each month this year, slowed to growth of only 0.1% for the period. Whether this is a sign of slowing growth overall or a turn toward traditionally appreciating assets, such as homes, remains to be seen.5
The presidential impeachment inquiry has not yet weighed upon the market as could have been expected as the S&P 500 Index capped 3Q19 by having its best three-quarter performance since 1997. By September’s end, the benchmark index was entering the fourth quarter with a 19% gain for the year and within 1.6% of its all-time high.6
Even with quantifiably positive economic news, there remains much about the markets that is uncertain. The U.S. is maintaining record-low unemployment and traditionally solid investments such as home sales and Treasury issued securities are trending upward. However, concerns over political turmoil, weakening U.S. manufacturing data, the Fed intervention in the REPO market, and the as-yet-still unresolved trade conflict with China are leaving investors in a holding pattern with a wait-and-see approach.
The overnight repurchase money market is a mundane—but essential—process of short-term bank-to-bank lending which helps ensure sufficient liquidity to conduct business. These loans are typically secured by Treasury securities and are called “repurchase agreements” because the borrower agrees to buy back the specific security used as collateral at a specified time. Referred to as “overnight” repos due to their most common duration, these agreements can have longer terms, too.
The Fed poured cash into this system across several days seeking to add liquidity to a market squeezed by the Central Bank’s recent-years policy of lowering its security holdings. Although these transactions generally take place between major investment and retail banks, because of their liquidity crunch, the Fed became the lender of last resort. From September 23-27 the Fed conducted $375 billion in repos with a commitment to offering more in the near term.7
Earlier in the month rates for repos had jumped to as high as 10% but the weighted average of all Fed repos through September 27 was a much calmer 1.80%. Indeed, after meeting high demand in its first offerings the September 27 repos—$100 billion in overnights and $60 billion in 14-day repos—were undersubscribed. 8
Over the final weekend of the month the benchmark 10-Year Treasury note slid slightly to 1.675%. For the quarter, the yield has dropped 0.325% marking the largest quarterly decline in seven years.9 The yield curve remained at the forefront of investors’ minds during September and 10-Year Treasuries ended the month at 1.98%, just above the 2-Year yield of 1.63%.
With the initial run up in the beginning of September, Stadion’s short-term technical indicators quickly flipped back on to suggest a favorable market environment while Stadion’s long-term technical indicator called for defensive positioning in half of the portfolio. When the market starts to consolidate and is stuck in such a tight range, like we saw in September, the models are more sensitive to their underlying technical indicators, especially the short-term model.
By the end of the month, after the market failed to break above previous highs, the short-term indicators called for partially defensive portfolio. Both models ended the month with a half equity, half defensive position allocation. Until the market breaks out of this range bound market we saw in September, we could see our underlying technical indicators jump around, especially our short-term model. However, we will continue to follow our models as our models are designed to be more defensive in order to protect our investors hard earned money from a significant decline in markets.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
The U.S. 2-Year Treasury Note is a debt obligation issued by the United States government that matures in 2 years.
Institute for Supply Management (ISM) is a U.S. based not-for-profit supply management association that serves professionals and organizations with a keen interest in supply management, providing them education, training, qualifications, publications, information, and research.
The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
A repurchase agreement, also known as a repo, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day, at a slightly higher price.
There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.
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