Trade and the ISM manufacturing Index weighed heavily on equities.  There is little I can add about trade…it is fluid, a fluidity based upon a five word tweet.

Regarding the ISM, the ISM dropped below 50 for the first time since 2016, the level between an expanding and contracting manufacturing sector.  The 49.1 reading was a shock, the result of economic uncertainty surrounding the trade war.  The majority of the decline was focused in new export orders which plunged to 43.3 from 48.1 prior, the lowest since April 2009.

Tariffs should be boosting input prices but the strong dollar appears to be blunting much—if not all—of the pass through.  Prices paid remained in contractionary territory (46.0 vs.45.1).

Generally speaking the ISM would have to sink into the low 40s and high 30s to be consistent with a broader downturn.   Economists are still projecting a 1.8% and 1.7% growth for the third and fourth quarter, respectively. In turn this will bring full-year growth down 2.2%.

To write the obvious, the media and the bond market were loudly pontificating about the “sure fire” recessionary data.  As written many times, 90% of trading is now algorithmic, trading based off of five word headlines utilizing momentum as the only parameter.

August was an extremely unique month.  According to the financial website FISUM, there were seven days which all markets moved in the same direction.  This is a black swan event blacker than negative interest rates, an event in itself is not even discussed in economic textbooks.  It is a statistical abnormality that should not occur but happened about 25% of August’s trading days.

Wow!  I will argue this is the result of technology trading that has entirely destroyed market mechanics.  The SEC, the Federal Reserve and several other regulatory entities have used words such as unbalanced or skewed to describe today’s environment.  Unfortunately if history serves as a guide, reform will only occur following a systemic crisis.

I will continue to argue a possible catalyst for such a crisis could be greater than expected growth that increases inflationary pressures that obliterates current monetary policy outlook.

Some will write this is wishful thinking given August’s ISM.  I beg to differ given the strength in jobs and housing prices in the secondary and tertiary markets.

Speaking of jobs, today the Fed releases the Beige Book or the statistical compilation utilized at the upcoming Fed meeting.  Moreover Friday is the release of the August employment report.  How will the statistics be interpreted?

Last night the foreign markets were up.  London was up 0.36% Paris up 1.05% and Frankfurt up 1.0%.  China was up 0.93%, Japan up 0.12% and Hang Sang up 3.90%.

The Dow should open moderately higher on reduced geopolitical tension from Italy to Britain to Hong Kong.  The 10-year is off 11/32 to yield 1.50%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.