Stocks searched for direction this week as investors digested news of political tensions and signs of trade progress. On Tuesday, the S&P 500 Index posted its biggest drop in a month as an impeachment inquiry was opened against President Donald Trump. The benchmark index then rebounded on Wednesday after the United States announced a trade agreement with Japan, and Trump signaled that a U.S.-China trade deal could happen "sooner than you think." On Friday the S&P 500 dropped on news that the United States is exploring plans to limit U.S. investors’ portfolio flows into China.
Economic data released in the week was mixed. U.S. manufacturing activity improved in September, according to preliminary Markit Purchasing Managers’ Index data. The Conference Board's Consumer Confidence Index posted its second biggest drop since 2011 in September, but the index is still elevated relative to history. Core personal consumption expenditures, the Federal Reserve’s (Fed) preferred gauge of consumer inflation, increased 1.8% year over year in August, indicating inflationary pressures remain manageable.
U.S. stocks underperformed both the MSCI EAFE Index of developed market stocks and the MSCI Emerging Markets Index during the week. European stocks slid for the first time in six weeks after Markit data showed Germany’s manufacturing activity fell to a 10-year low, and political uncertainty increased as the Oct. 31 deadline for the U.K.’s exit from the European Union (Brexit) neared.
Large cap value stocks led returns during the week. Consumer staples and utilities were among the best-performing sectors, while communication services, energy, and healthcare lagged.
Fixed income markets gained during the week as global investors sought safe-haven assets amid stock volatility and elevated uncertainty. The 10-year U.S. Treasury yield slid, but the yield curve steepened slightly as short-term yields fell faster than long-term yields. The spread between the 2-year and 10-year yields is still in positive territory, but other parts of the curve remain inverted (short-term yields higher than longer-term yields). Separately, the Fed continued to stabilize the short-term lending markets through securities repurchases to keep rates in line with targets.
Oil prices dropped during the week, giving back most of their gains after the attack on Saudi Arabia’s oil facilities spurred a 15% rally. The U.S. dollar climbed for a second week amid trade progress, even after the Fed cut its policy rate by 25 basis points (0.25%) September 17. Gold fell for the fourth time in five weeks.
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