Stocks Drop on Economic Growth Concerns

By :Angelo Kourkafas October 02, 2019

U.S. stocks have declined by more than 2.5% over the last two days (Oct. 2) on worries that a slowdown in manufacturing will spread to other parts of the U.S. economy. The catalyst for the increased volatility was the release of the U.S. Purchasing Managers' Index (PMI) on Tuesday (Oct. 1), which showed manufacturing activity contracting in September for the second month in a row, falling to its lowest level in 10 years. Cyclical sectors led the way on the downside, with industrials, financials, materials and energy among the hardest hit.

Takeaways from today

While market volatility can be unsettling, we're not surprised by its return or the slowdown in manufacturing. We highlight the following:

  • Manufacturing isn't king – Manufacturing has been the primary pressure point in the U.S. economy for most of 2019, as activity has softened in the U.S. and globally over the course of the year. Ongoing trade tensions, slowing global growth and a stronger U.S. dollar all pose challenges for manufacturers. However, the U.S. is far more dependent upon the services component of the economy versus goods production, which accounts for less than 20% of GDP. Service sector companies have stayed resilient, with the services PMI index remaining in expansion territory and above 10-year average levels. As long as services stay strong, we believe the economy can withstand a manufacturing downturn in the short term, as it did in 2015-2016.
  • Consumers are still spending – Consumer spending, the lion's share of the U.S. economy, remains a bright spot, supported by record-low unemployment, rising wages, low borrowing costs and healthy household balance sheets. We expect job growth to decelerate from here but still be strong enough to keep the unemployment rate near 50-year lows. With manufacturing making up under 9% of total jobs created, we don't think a slowdown in hiring in that part of the economy would make a big dent.
  • Look to the fundamentals – The S&P 500 is up almost 17%* so far this year and down only 4% from its all-time high, supported by reasonably positive fundamentals, still-rising corporate profits and an accommodative Federal Reserve. We think all these conditions are still in place, but uncertainty remains high as trade, tariff and geopolitical concerns persist. Stocks have moved up or down more than 2% seven days this year, compared with an annual average of 14 days since 1970. We believe a return to normal market volatility should be expected but doesn't alter our view the economy will grow in the year ahead rather than fall into a recession and the bull market in stocks continues.

Angelo Kourkafas, CFA

Investment Strategy Analyst

Important Information:

*The TSX and S&P 500 are unmanaged and are not meant to depict an actual investment.

Past performance does not guarantee future results.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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