Before the Bell

Before the Bell

Morning Market Brief

August 15, 2019

FOR IMPORTANT DISCLOSURES, PLEASE SEE THE DISCLOSURE PAGES AT THE END OF THIS DOCUMENT

MORNING MARKET COMMENTARY: Anthony M. Saglimbene, Global Market Strategist

? Quick Take: U.S. futures are pointing to a stronger but volatile open; European markets are trading down; Asia ended mostly lower overnight; West Texas Intermediate (WTI) oil trading at $54.84; 10-year U.S. Treasury yield at 1.57%.

? Where We Stand After Yesterday's Stock Rout & More Bond Market Tumult: Yesterday, the S&P 500 Index suffered its second-biggest daily percentage decline of the year, which followed its biggest bounce of the year on Tuesday. Large up and down days in the market are generally clustered around one another, mainly because investors are less certain about the future, and the tug-of-war in price action is played out through higher stock volatility. However, these periods tend to be short-lived, and one way or the other, investors will find an equilibrium level for stock prices. That may be higher or lower than where equity prices currently sit ? and yes we know that's not very reassuring.

? Additionally, that equilibrium price across stocks may take more time to develop, as higher recession probabilities, further inversion across the yield curve, trade tensions, and uneven growth around the world will undoubtedly play into central banker policy in the weeks and months ahead. Please see Wednesday's After The Close for more detail on the 10-Year/2-Year yield inversion and implications for the market. This morning, U.S. pre-market activity has been volatile, as China threatened retaliation for the Sept. 1st tariff announcement by the White House. However, Beijing said it wanted to meet the U.S. halfway during upcoming trade discussions.

? Today, we are going to do a quick inventory check on where we stand following this week's volatility as well as what investors should keep top-of-mind through the coming weeks. As the first FactSet chart on page 2 shows, U.S. stocks are still positive for the year, and we shouldn't discount this point. Even with all the volatility this month, the Index is only off 6.0% from its all-time July high. Yes, we are going to highlight a few `not so positive' items that pose a risk to stock prices, but some perspective is warranted, given it's been a rather good year for U.S. equities outside the May and August swoons. With that said, the S&P 500 is down 4.5% MTD, and any data suggesting the macro environment is getting worse could be met with selling pressure that dent those YTD gains. There is still some distance between the current S&P 500 level and the 200-day moving average.

Notations:

? For further information on any of the topics mentioned, please contact your Financial Advisor.

? Unless specifically stated otherwise, comments contained in this document should not be construed as an investment opinion or

recommendation of any securities mentioned. Charts depicted are from FactSet unless otherwise noted.

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? 2019 Ameriprise Financial, Inc. All rights reserved.

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? If the story of bonds outperforming stocks over the last year wasn't getting enough attention, we believe the chorus may get even louder if stocks continue to trend lower this month. As the second FactSet chart on page 3 illustrates, the gap between stock and bond performance has widened in August, as yesterday's stock plunge puts core bond and investment-grade bonds well ahead of S&P 500 returns over the last twelve months. According to Morningstar, $500 billion has flowed into fixed income mutual funds through the first half of 2019, the fastest pace of flows since the financial crisis. Last week, global money market funds took in $102 billion during the five business days, the second-largest weekly total since EPFR Global began tracking the data in 2007. In an uncertain environment, all types of investors are seeking shelter in more conservative investments, which is helping propel bond versus stock outperformance.

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? 2019 Ameriprise Financial, Inc. All rights reserved.

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? On a brighter note, the third FactSet chart on page 3 shows fewer stocks in the S&P 500 are currently trading above their 50-day moving average. Although not a clear signal that all the froth has been removed from stock prices, the Index is near May levels. Consequently, opportune traders may have readied their shopping lists over recent days and could look for stock opportunities that present better price points than back in July. At some point, we believe this may add some support for the overall market.

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? 2019 Ameriprise Financial, Inc. All rights reserved.

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? With that said, S&P 500 profit margins may have peaked for this cycle, as the fourth FactSet chart below highlights. In the last two recessions, S&P 500 profit margins peaked and then rolled over ahead of the downturn. In our view, this is a critical item to watch, as growing trade tensions and a pronounced economic slowdown across Europe and Asia could materially dent multinational profits moving forward.

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? 2019 Ameriprise Financial, Inc. All rights reserved.

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? That leaves us with the consumer, which is 70% of the U.S. economy. If the U.S. is going to avoid a more pronounced downturn, the consumer has to hold. The last three FactSet charts paint a rather solid picture of the consumer today. Consumers are employed, their confidence is high, and they are spending. In our view, these trends will have to remain constant for support to develop across risk assets. However, if employment and consumer trends turn more negative, we believe risk assets could be vulnerable to further pressure. We believe the consumer is the line in the sand for the U.S. economy and market sentiment. If cracks develop here, stock valuations are too high, in our view. Watch the softer confidence data for any signs of cracks developing. This morning's July retail sales report (which was stronger than expected) should also pique traders interest for clues on the health of the consumer.

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? 2019 Ameriprise Financial, Inc. All rights reserved.

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