Bob’s Journal for 10/3/19

Some Things That Grabbed My Attention This Week

It looks like we’re going to have a very interesting fourth quarter of 2019, just as we did in 2018.

Here are a few developments from the last week that are relevant for us. Big news for individual investors came from the brokerage industry.

Interactive Brokers announced last week it was creating a zero-commission stock-trading service. This week, Charles Schwab followed suit, announcing that it would end commissions on online trades in U.S. stocks, exchange-traded funds (ETFs) and options, lowering the price to zero, down from the previous $4.95.

TD Ameritrade quickly announced it would eliminate commissions on online trades of U.S. stocks and ETFs, and E*Trade followed with the same announcement. This is good news for investors, except for those who own shares in the affected brokerage and mutual fund stocks. Share prices of the publicly traded brokerages and mutual fund firms tumbled following the announcements. None of the firms announced how they would replace the lost revenue, which will be substantial.

Customers should watch for other changes. Services might suffer as the firms reduce expenses to match the lower revenue. Also, clients might not receive the same level of trading execution. The firms might impose some new fees in a few months or say that the zero commissions are available only for minimum trading volumes or account levels.

Also in the last week, investors panicked over signs of a continuing decline in manufacturing.

The ISM Manufacturing Index released Tuesday fell again in September to 47.8 from 49.1 in August. Readings below 50.0 are said to indicate manufacturing is contracting. The level was well below analysts’ estimates and is the lowest level since June 2009.

While much of the survey was weak, export orders led the decline by falling to 41.0. This was the third consecutive month below 50.0 for exports.

The ISM report matches other poor manufacturing surveys from around the globe. The markets took the news hard, tumbling substantially on Tuesday and Wednesday. The first trading days of October were the worst start to a quarter since 2009, according to Bloomberg.

There are a few points to consider before concluding the report indicates a recession is at hand.

The ISM Manufacturing Index is based on surveys of select businesses, not hard data. The results can vary based on factors such as which businesses respond to the survey each month. Also, several other U.S. manufacturing surveys reported in the last month aren’t as negative as the ISM Index.

The ISM Index isn’t consistent with the PMI Manufacturing Index. The September PMI Index announced the same day as the ISM Index rose to 51.1 from 50.3. Many economists prefer the ISM Index, because ISM surveys more businesses and a broader range of industries.

The ISM Manufacturing Index used to be a reliable advance indicator of recessions. In the last couple of decades, however, the index has fallen into contraction territory without the overall economy following it into a recession. In fact, the index is only about 50% accurate as a recession indicator, according to Bespoke Investment Group.

Investors should keep in mind that manufacturing is a small part of the U.S. economy, and its share of the economy generally is declining.

Overall, the U.S. housing market is improving from its slowdown in 2018 and early 2019. But the high-end markets that led the national market most of the last few years are suffering.

The home price reports in recent months indicated that the national average prices are barely increasing because prices are falling in the coastal markets that surged in recent years. This article points out that prices in Miami, especially of high-end condos, are about to collapse. This article describes New York City luxury housing prices are in a free fall.

There are several factors causing the decline in high-end housing markets.

There is more selling and less buying, partly because the Tax Cuts and Jobs Act limited tax deductions for state and local taxes and mortgage interest. Lower tax deductions increased the cost of owning these homes.

Of course, housing prices can’t increase faster than incomes indefinitely. Prices in the hot coastal markets rose rapidly following the financial crisis. You’ve probably seen the stories of people with healthy incomes struggling to find housing they can afford in San Francisco and other cities with strong housing markets. Eventually, such imbalances must end.

The bottom line is that the recent fall in interest rates is likely to help housing in most of the nation. But the red-hot markets of recent years are likely to cool, and that will have a negative effect on national housing data.

The Data

Personal Income increased 0.4% in August, following a 0.1% rise in July. Wages and salaries climbed 0.6% in August.

Despite the increase in income, consumers spending rose only 0.1%, following a 0.5% gain in July.

Inflation was almost dormant as measured by the Personal Consumption Expenditure Index. The index was unchanged in August, after excluding an increase in food and energy of only 0.1%. Over 12 months, those measures climbed 1.4% and 1.8%, respectively.

Durable Goods Orders increased 0.2% in August, following a 2.0% rise in July. Economists expected a decline of more than 1%. Excluding transportation, orders increased 0.5%. But core capital goods, a measure of business investment, declined 0.2% in August. And the July orders that were initially reported as a 0.4% increase were revised lower to no change.

Factory Orders declined by 0.1% in August, compared to a 1.4% increase in July. But the August data were better than most economists’ forecasts.

The Dallas Fed Manufacturing Survey found continued growth in the region. The Production Index of the survey was 13.9 in September, compared to 17.9 in August. The General Activity Index was 1.5, compared to 2.7 in August.

The Chicago Purchasing Managers Index tumbled into recession territory, coming in at 47.1 for September compared to 50.4 for August. This is a regional survey and tends to be very volatile.

As I discussed above, the ISM Manufacturing Survey fell further below 50, coming in at 47.8 for September compared to 49.1 in August.

The PMI Manufacturing Index rose to 51.1 in September from 50.3 in August.

The service sector also was weaker in September, though it still is growing. The ISM Non-Manufacturing Index declined to 52.6 from 56.4. The PMI Services Index didn’t decline. It was reported at 50.9 for September, compared 50.7 in August. But the index indicates the service sector is barely growing, according to the survey sample.

Consumer Sentiment, as measured by the University of Michigan, increased to 93.2 in September from 92.0. Despite the improvement, it is one of the lowest levels in the last three years. This report continues to conflict with the Consumer Confidence report from The Conference Board.

The employment market continues to improve but at a lower rate than a year ago. The ADP Employment Report estimated that 135,000 private sector jobs were created in August, which compares to 157,000 created in July.

New unemployment claims increased 4,000, following a revised increase of 5,000 last week. The total is 219,000, which still is low historically. The four-week average is unchanged.

The Markets

The S&P 500 fell 3.21% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 3.29%. The Russell 2000 dropped 4.45%. The All-Country World Index (excluding U.S. stocks) lost 2.63%, while emerging market equities fell 2.21%.

Long-term treasuries rose 1.69% for the week. Investment-grade bonds increased 0.63%. Treasury Inflation-Protected Securities (TIPS) added 0.19%, while high-yield bonds lost 0.89%.

On the currency front, the U.S. dollar increased 0.04%.

Energy-based commodities declined 3.59%. Broader-based commodities lost 2.03%, while gold decreased 0.35%.

Bob’s News & Updates

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