U.S. Stock Market Investors Adjusting to Slowing Economy

The major U.S. stock indexes settled mixed last week with the S&P 500 Index and Dow Jones Industrial Average finishing lower for a third straight week and the NASDAQ Composite edging higher. At the same time, government bonds closed higher, helping to smooth out the volatility for investors with balanced portfolios.

In the cash market last week, the benchmark S&P 500 Index settled at 2952.01, down 0.30%. It’s up 17.8% for the year. The blue chip Dow Jones Industrial Average closed at 26573.72, down 0.90%. Its annual gain is 13.9%. The technology-based NASDAQ Composite finished at 7982.47, up 0.50%. In 2019, it’s up 20.3%.

General Causes of Last Week’s Volatility

Last week’s price action was driven by a combination of slowing economic data and geopolitical risks that led to elevated volatility. However, the overall fundamentals appeared to be strong enough to remain constructive. These events helped produce a two-sided trade last week.

“Cyclical sectors led the way on the downside as a string of disappointing U.S. economic data fueled worries that a slowdown in manufacturing will spread to other parts of the U.S. economy,” stated Nela Richardson, PHD, an Investment Strategist at Edward Jones.

“The Purchasing Managers’ Index showed that manufacturing activity contracted in September for the second month in a row. The services index also declined but remained in expansion territory. Topping off the data was September’s jobs report, which provided some assurance that despite a slowdown in hiring, the labor market remains tight, a positive for consumers and the economy,” she added.

Headed Toward Modest Growth or Recession?

The question remains, “Is the U.S. moving into a period of modest growth, or toward a recession?” At this time, investors are in the midst of the longest economic expansion in U.S. history and the second longest and strongest bull market. However, at times, it doesn’t feel that way due to bouts of heightened volatility caused by economic uncertainty. This is causing some bullish investors to step back and reconsider whether we’re seeing early signs of the end of the expansion and the bull market.

Not a Bad Economy, Just a Slowing Economy

Stocks sold off last week after the release of a weaker-than-expected ISM Manufacturing PMI report. In my opinion, the selling pressure was more of a precautionary move, or position-adjustment as investors shaved positions in risky assets and placed their funds in safe-haven assets.

The selling wasn’t hot and heavy like we saw earlier in the year, or even a year ago. Remember the steep break that began the first week of October 2018? That came at a time when the Fed was raising rates. This time, the Fed has already cut rates twice since July and likely to cut again at the end of the month. This should help slowdown the weakness in the economy

Furthermore, the report only signals that manufacturing is contracting and not the broader economy. Don’t get me wrong, manufacturing performance and overall economic performance are correlated, however, manufacturing accounts for less than 10% of output and 9% of jobs created.

Other factors to consider before you pronounce the bull market dead and the onset of recession, unemployment hit a 50-year low in September and consumer spending is still growing, on pace with income growth.

The benchmark index is about 4% down from its all-time high, and volatility is high. Rallies have been getting shorter, but investors are still showing a willingness to buy dips into value areas.

Traders are going to have to get used to the high volatility and violent swings until the uncertainty of a trade deal between the United States and China is lifted. Hopefully, this process will take a step forward when the two economic powerhouses meet in Washington on October 10-11.