By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH: August 16

Aug 16, 2019 | 9:16 AM

Big Picture

Volatility Returns as Recession Fears Mount; Dow Drops 800 Wednesday

It was a rough start to the week for what’s proving to be an increasingly volatile time for North American equity markets. U.S. stocks fell Monday as a wave of selling inspired by mounting doubts over a U.S.-China trade deal pulled everything from financials to tech companies lower. At one point late in the session, the Dow Jones Industrials were down by as many as 462 points before closing 391 points in the red, while the TSX closed down 103 points.

On Tuesday, stocks, bond yields and commodities regained ground over news that the Trump administration had abruptly suspended plans to impose new tariffs on about $156 billion in goods from China, citing concern over the negative impact the additional tariffs might have on the U.S. holiday shopping season.

Any hopes for an extended rally quickly vanished Wednesday as recession fears took centre stage amid troubling news from the U.S. bond market, which saw yields on 10-year Treasurys fall below two-year yields for the first time since 2007. Adding to concerns of a global slowdown was a host of weak economic data out of China, including higher jobless numbers and lower-than-expected production and consumption data. Meanwhile, Germany’s Q2 GDP shrank 0.1% as declining foreign trade overshadowed strong domestic consumption. By day’s end, the Dow had recorded its worst session of 2019, plunging 800 points, while the TSX dropped over 300.

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By Thursday’s close, U.S. stocks had stabilized somewhat, thanks in part to strong retail sales data, while the TSX finished slightly off.

Finally, the impact of tariffs is being felt by American consumers. U.S. inflation picked up in July, with core prices (excluding food and energy) posting the strongest two-month gain since 2006.

Markets

N.A. Markets Lose Ground

For the four days covered in this report, the Dow plunged 708 points to close at 25,579, the S&P 500 lost 72 points to settle at 2,847, while the tech-heavy Nasdaq dropped 193 points to close at 7,766. In Canada, the TSX declined 329 points to end at 16,012.

Equities/Strategy

Equities

Yield curve inversion sparks steep sell-off in equity markets this week. For the first time since early 2007, the spread between the 2-year and 10-year treasury yields has turned negative. Investors typically view this as a signal that a recession is imminent. Historically, the yield curve has been a fairly good leading indicator but the exact timing between inversion of the yield curve and the beginning of a recession has varied significantly. On average, the yield curve inverts (on a 2yr.-10yr. basis) 15 months prior to the beginning of a recession, though it has taken as long as 22 months and as little as 9 months, in the past. Importantly, equity markets have historically continued to rally after the inversion of the yield curve, to the tune of 16% on average, before eventually turning downward. We continue to recommend investors hold high quality issuers in their portfolios that are best able to withstand the expected volatility ahead. Our preference is for companies with clean balance sheets, sustainable competitive advantages, and efficient sources and uses of capital.

(Bill Curry)

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