The summer months ended as eventfully as they had been throughout, with the major fundamental themes of global economic slowdown, monetary policy reversion to easing, and trade war overhang all continuing to play out into August. Economic growth data and estimates continued to soften, albeit still at positive levels. Global manufacturing activity continued to decline. For the second consecutive quarter US corporations, as indicated by the S&P 500 Index, reported negative earnings growth compared with the same quarter last year.
While growth is still positive enough to make recession calls still appear premature, a slowdown is certainly here, as markets and central banks have fully confirmed. The 30-year Treasury bond yield fell to a record low of below 2.0 percent in August, equity market volatility rose, and gold prices accelerated to a six-year high in August. The S&P 500, Dow and Nasdaq indexes did not fall too far off their highs, but they are all supported by relatively strong, high-quality constituents. Smaller and more cyclical groups fared worse: Energy stocks had fallen more than 15 percent from their last peak through August, and small-cap value stocks were down over 10 percent from a year ago.
Policymakers have taken notice, easing monetary policy around the globe, and, early in September, markets have reversed some of the flight to safety they made over the summer. In the US, the Federal Reserve has begun what forecasters expect to be at least a few small interest rate cuts, the European Central Bank has restarted quantitative easing to go with their negative interest rates, following Japan’s lead, and China is implementing or considering a litany of easing measures. Even US and China trade tensions appear to have eased. Riskier investments have rebounded a bit with optimism around these developments, but the question now is whether economic and corporate fundamentals will follow suit.