Stock market volatility continued last week, with the latest worries centered on falling bond yields and further yield curve inversion—the 30-year Treasury yield dropped below 2%, while 10-year Treasury yields briefly fell below 2-year yields.

Historically, the 10y-2y curve inversion has preceded U.S. recessions, but it has not been good at timing recessions. It has not predicted stock market returns well either. Following the last five inversions, the U.S. has entered a recession an average of 22 months later and the S&P 500 has posted an average subsequent 12-month total return of +12%.

Dow Jones-1.412.73.7
S&P 500-0.916.73.8
MSCI EAFE-1.48.3-2.3
MSCI Emerging Markets-1.02.6-2.2
10-year U.S. Treasury1.552.722.41
30-year U.S. Treasury2.033.022.74

Source: Janney ISG, Bloomberg. Data as of 8/16/19.

Meanwhile, the incoming economic data continues to suggest positive economic growth that should support profit growth in the coming quarters. We continue to recommend a benchmark weighting to stocks and bonds.

Small Business Optimism and Healthy Retail Sales Offset Manufacturing Weakness

While last week’s manufacturing data remained weak, small business optimism and retail sales suggest a sturdy economy.

The National Federation of Independent Business (NFIB) Small Business Optimism Index rebounded in July, and is up in five of the past six months—suggesting that small firms remain upbeat about their growth prospects. Expected sales and earnings trends both increased, a sign of solid demand. The outlook for the economy and prospects for business expansion improved, while capital expenditure plans edged up. Current job openings and hiring plans for the next three months picked up—a sign of further labor market strength.

Consumer Remains Alive and Well

Retail sales jumped 0.7% in July, the most in four months, and more than double the consensus of 0.3%. Most major categories advanced, led by a 2.8% surge in online sales, due to Amazon Prime Day deals. Restaurant sales climbed 1.1%, the most in over a year. On a y/y trend basis, retail sales were up 3.3% and have accelerated from earlier this year. This shows underlying consumer resilience, partly due to the strong labor market and despite some signs of weakness elsewhere in the economy (manufacturing).

Labor Market Remains Healthy

Despite a modest 9,000 uptick to 220,000 last week, initial jobless claims and its four-week average continue to hover near multi-decade lows, indicating tight labor market conditions. We continue to pay close attention to jobless claims, which has historically been an accurate and timely indicator of overall economic conditions—the current message continues to be positive.

Consumer Prices Tick Up

The Consumer Price Index (CPI) increased 1.8% on a y/y basis, while core CPI (which excludes volatile food and energy) was up 2.2%, both accelerating from the previous month and close to the Federal Reserve’s 2.0% target. Inflationary pressures remain muted which is giving the Federal Reserve the ability to cut interest rates.

Manufacturing Remains Weak

Industrial production fell 0.2% in July, with manufacturing off 0.4%, and mining down 1.8%, the most since April 2016. Utilities output rebounded 3.1% on warm weather. Core industrial production, which excludes energy, high-tech, and vehicles, declined a broad-based 0.4%. On a y/y basis, industrial production was up a mere 0.5%, the least since February 2017, with manufacturing actually shrinking 0.5%, and core production falling 0.9%, the biggest drop since September 2016. Regional Federal Reserve surveys released last week suggest further manufacturing weakness.

This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Past performance is not necessarily a guide to future performance.

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