Last week, U.S. equities finished higher for the second week in a row, with the S&P 500 closing at 2,979, up 1.8% approaching record highs. The Dow Jones Industrial Average closed up 1.5%, and the Nasdaq up 1.7%, while the 10-Year U.S. Treasury finished at 1.55%.
The main driver of the rally was news that China and the United States agreed to resume high-level, face-to-face trade talks in Washington in early October. Over the next several weeks, staff on the two sides will hold talks and phone calls to set the stage for the upcoming meeting. The market has consistently overreacted to news around escalating trade threats and resumption of trade talks over the last several months. For context, there have been 13 “high level meetings” already, and tariffs have done nothing but rise. At Haverford, we continue to maintain a healthy dose of skepticism about any near-term resolution.
At the risk of sounding like a broken record, trade activity with China is not the main driver of the overall health of the U.S. economy. The main risk with the tariff situation is the uncertainty that could spill over into the decision making of businesses with respect to hiring and capital spending. In fact, we are beginning to see that with the manufacturing data for August. U.S. manufacturing Purchasing Managers Index (PMI) fell below 50 in August, at 49.1, entering contraction territory for the first time in 35 months. Although manufacturing has increasingly become a smaller part of the U.S. economy, it remains an important leading indicator, considering it is a meaningful driver of corporate profits which drive future capital spending and employment growth. Looking beneath the hood of the August survey results, the main driver of the decline was the new orders index, which came in at 47.2 for August, below the prior month’s 50.8 reading. Timothy Fiore, Chair of the ISM Business Survey Committee, commented,
“Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019.”
Last week, we also saw the August jobs report. Although the headline number at 130,000 new jobs was below expectations, and includes 25,000 temporary workers hired to help prepare for the Census next year, the underlying numbers were actually quite strong. The pace of job additions was enough to hold the unemployment rate steady at 3.7%, which remains close to 50-year lows. Temporary employment rose by 15,400, average hours worked rebounded to 34.4 from 34.3, with the labor force participation rate up 0.2% to 63.2%. We saw some weakness in retail, down 11,000 jobs from the prior month, although that likely reflects the trade uncertainty finally affecting the sector. Average hourly earnings rose +0.4% sequentially, and +3.2% year-over-year, marking 13 months of wage growth above 3%—overall very strong data points.
As the Fed continues to stress a more data-dependent approach, the positive jobs report weakens the case for a 50bps rate cut at the upcoming September 18th Federal Open Market Committee (FOMC) meeting, but we continue to believe a 25bps cut is likely. The Fed’s outlook for the U.S. economy remains favorable despite business investment and manufacturing weakening. Solid job growth and rising wages have been and should continue to drive robust consumption, supporting moderate growth overall. The August jobs report continues to support this view.