Stocks rebounded from some of their recent losses last week as trade tensions between the U.S. and China appear to have cooled off a bit. For August in total, during which there seemed to be one market crisis after another, most of the major stock market indexes finished down more than 1%, knocking their September quarter-to-date returns into the red. That was especially the case for the small-cap focused Russell 2000, which, after factoring in its August slide, finished the month down 4.6% for the current quarter.
By comparison, the Real Money Post-Industrial Average (RMPIA) was flat for the turbulent month of August, which brought its rise over the last two months to 0.6%, once again handily beating all the major domestic stock market averages. RMPIA is a modified market-cap weighted portfolio consisting of 30 of the most important stocks in the market today. Given the overall market's performance, it comes as little surprise that half of RMPIA's constituents moved lower month over month during August. The biggest losses were had at Kraft Heinz (KHC) , which dropped more than 20% during August. Other notable decliners included Netflix (NFLX) , which is facing a toughening competitive landscape in general and a potentially formidable competitor in Walt Disney (DIS) . Offsetting those declines were meaningful gains in Amgen (AMGN) and CVS Health (CVS) , as well as Costco Wholesale (COST) and Qualcomm (QCOM) .
Looking back over the last few weeks, the market was grappling with a number of uncertainties. The most prominent one was the announced tariff escalation in the U.S.-China trade war, but there were also the growing number of signs that outside of consumer spending, the economy continues to soften. We saw that consumer strength in Friday's July Personal Income & Spending data, but also in last week's second June quarter GDP revision that ticked down to 2% from 2.1%, even though estimates for consumer spending during the quarter rose to 4.7% from 4.3%. We would note that 4.7% marked the strongest level of consumer spending since the December 2014 quarter. We are, however, seeing a continued shift in where consumers are spending -- including at restaurants, department stores, quick service restaurants, discount retailers and online. RMPIA remains well positioned to capture that shift with constituents Amazon (AMZN) , Costco Wholesale.
Another issue for investors as we closed out August was the yield-curve inversion. While historically speaking this does raise a red flag, it's not a foregone conclusion that a recession is around the corner. Rather it can be several quarters away, and there are several stimulative measures that could be invoked to keep the economy growing.
More than 99% of the S&P 500 has reported earnings for the June-quarter season, and earnings per share for that group rose just under 1%, which was far better than the contraction that was lining up just a few weeks ago. Based on corporate guidance and other factors, however, earnings per share expectations for both the September and December quarters have been revised lower. Some of this no doubt has to do with the next round of tariffs poised to take effect on Sept. 1 on Chinese imports, but we can't dismiss the slowing speed of the global economy, either.
Despite that August gloom, there were some bright spots to be had. One in particular was the improving outlook for the 5G market. Not only did specialty contractor Dycom (DY) give a bullish outlook for network construction, but we received several positive forecast revisions concerning the 5G market:
- Nomura now expects fully 512 million 5G smartphones to be sold in 2021, up from a previous forecast of 402 million.
- Gartner raised its 5G phone sales forecast for 2023 by roughly 5%.
- And IDC now expects around 28.1% of all phones sold in 2023 to sport 5G connections, up from a prior forecast of 26.3%.
- CCS Insight expects connections to 5G networks will surpass 1 billion in 2022, taking a year less than 4G did to clear that milestone.
We see this burgeoning market as a positive for several RMPIA holdings over the coming quarters, including Qualcomm and Broadcom (AVGO) . We also see 5G fostering a strong upgrade cycle in for iPhone at Apple (AAPL) .
Without question, investors and Corporate America are eager for progress on the trade war to materialize. While there have been several head fakes in recent months, we remain optimistic. We continue to believe the devil will be in the details, when it comes to a potential trade agreement, though, and much like deciphering economic data, it will mean digging into the agreement to fully understand its ramifications. Those findings and their implications as well as what we hear on the monetary policy front will set the stage for what comes next.