Pretty much every sector of the global stock markets was significantly higher last week. The Dow Jones Industrial Average and the S&P 500 each touched new intraday highs, but the tech-heavy Nasdaq performed best among the domestic indices for the week. Trading volumes were generally subdued through Thursday as traders awaited the start of earnings reporting season, which kicked off Friday with the release of second-quarter results from several major banks. Stocks rallied further into the close of the week, which some attributed to hopes for a repeat of the previous quarter’s upward earnings surprises.
The domestic markets were generally flat early in the week, with the S&P 500 suffering only a brief sell-off on Tuesday morning after President Trump’s son released emails showing that, despite repeated strong denials by him and multiple administration officials, he had indeed had contact with a Russian lawyer during the election campaign. Politics were also in focus in terms of the Republican health care bill. The announcement later on Tuesday that the Senate was delaying its August recess to deal with health care helped the market recover from the latest Trump scandal.
Attention on Wednesday shifted to the Federal Reserve. Fed Chair Janet Yellen’s semi-annual testimony before Congress struck a generally dovish tone. Yellen signaled that the Fed was in no rush to tighten monetary policy, and offered reassurances on the current state of the economy. Traders may also have been relieved that she avoided repeating the reference she had made in late June to asset prices as being “somewhat rich.”
The bank earnings released Friday offered both positive and negative surprises, but the group as a whole moved lower in early trading. Disappointing economic data may have been to blame, with retail sales in June falling for the second straight month. Traders may also have been discouraged by continuing weakness in core (less food and energy costs) inflation, which rose only 0.1 percent for June. What is now four consecutive months of subdued core inflation may complicate the Fed’s plans to raise interest rates, which may have given stocks a bounce into the close. Indeed, in her Wednesday testimony, Yellen referred to weak recent inflation readings and stated that “monetary policy is not on a preset course” but that “the Committee will be monitoring inflation developments closely in the months ahead.” The soft inflation data helped U.S. Treasuries produce positive returns as well last week.
Foreign stocks were also higher last week. European stock indexes rose even more than their domestic counterparts, rallying more than two percent while emerging markets stocks were higher still, jumping more than five percent. In Europe, traders moved back into equities following signs that the major central banks would not move as quickly to tighten monetary policy as once thought. Along with Fed Chair Yellen’s comments, Bank of England Deputy Governor Ben Broadbent said he is not ready to vote for higher interest rates, even though he sees building pressure to do so. On the news, the pan-European Stoxx 600 Index ended the week higher, recording one of its biggest weekly gains in two months. The German DAX and the French CAC 40 both ended the week higher as well.
In Asia, Japanese equities rallied last week too, recouping almost all of the declines during the prior two weeks. The widely watched Nikkei 225 Stock Average advanced almost one percent. Elsewhere in the Far East, surprisingly strong June trade data from China were the latest indicators pointing to a resurgent global economy. China’s exports rose 11.3 percent in June from a year earlier, marking the fourth straight monthly gain, the government there reported. Meanwhile, China’s imports surged 17.2 percent from a year ago, leaving a trade surplus of $42.8 billion. Both the export and import figures exceeded analysts’ forecasts and May’s gains.
June’s trade data showed continued buoyant foreign demand for Chinese exports as well as resilient demand on the mainland for overseas goods, even as Chinese officials have tightened policy and taken steps to reduce debt. Analysts scrutinize trade data from China, the world’s largest exporter, for clues about the strength of global demand, though in recent years Chinese officials have sought to reduce the economy’s dependency on exports. Export declines weighed on China’s growth in the past two years but have recovered this year thanks to strong demand from the U.S. and Europe.
The exceptionally strong week for stocks around the world caused some to re-think the rally that has continued mostly unabated since last November. Domestic stocks initially surged after the election on hopes of pro-growth policies such as tax reform, deregulation and infrastructure spending from the incoming administration. However, despite a Republican president and Republican majorities in both the House and the Senate, none of these hoped-for policies have been passed, at least as of yet. Congress has not even been able to pass a health care bill to this point, yet stocks continue to rise.
That this positive price action in the markets has continued despite none of the promised political action taking place in Congress may seem counterintuitive, but Ned Davis Research has newly published historical research showing that stocks tend to perform better during periods of political uncertainty. More specifically, when the Philadelphia Federal Reserve’s Partisan Conflict Index — a measure of political disagreement in the United States — rises above 100, the S&P 500 has risen at a 11.7 percent annual rate. By way of contrast, the S&P has risen at an annual rate of just 5.8 percent when the index is below 100, according to analysis published last week.
Political conflict alone isn’t enough to drive markets, of course. Most importantly, corporate earnings are expanding at a record pace and economic growth is steady, if not as strong as desired. Perhaps traders like political conflict because they fear legislative changes might derail the strength they perceive today, but that is pure speculation, of course.