Higher, but Quietly
U.S. stocks recorded gains last week, mostly due to a solid rally on Tuesday. Trading volumes were light, however, with the number of shares traded on Wednesday falling to the lowest level of the year so far, according to The Wall Street Journal. Trading was choppy as earning season mostly wrapped up and focus began to shift toward the coming budget and debt ceiling battles in Washington.
Energy stocks rebounded last week from their losses the previous week, and real estate shares were also particularly strong. Consumer staples stocks – grocers, in particular – were notably weak following Amazon’s announcement that it would soon lower some prices at its recently acquired Whole Foods stores. Advertising stocks also fell sharply after UK-based industry leader WPP lowered its growth forecasts, citing “increasing social, political, and economic volatility.”
With the second-quarter earnings reporting season largely complete, economic data and political news continued to drive sentiment last week. One important factor in Tuesday’s rally appeared to be a report in Politico that Republican lawmakers were making progress behind the scenes on tax reform legislation. According to the report, a consensus was emerging among top administration and congressional officials on ways to pay for cuts to individual and corporate tax rates, including capping the mortgage interest deduction and eliminating the deduction for state and local tax payments. Businesses would no longer be able to deduct interest payments, according to the report.
Political concerns seemed to weigh on the market later in the week, however. The market’s pullback on Wednesday appeared to be due in part to President Trump’s threat at a campaign rally the previous night to allow a shutdown of the federal government at the end of September if Congress does not approve funding for the border wall he has repeatedly assured voters that Mexico would pay for. Traders may have also reacted negatively to his warning that the U.S. may pull out of the North American Free Trade Agreement. Finally, some appeared to worry about the president’s tweets later in the week, in which he criticized Republican leaders for not having arranged to raise the debt limit as part of recent legislation benefiting veterans.
A mixed bag of economic data left longer-term U.S. Treasury yields largely unchanged last week. Surveys indicated slowing growth in manufacturing activity, but the much larger services sector appeared to be gaining strength. New home sales declined in July, but this decline was offset somewhat by upward revisions to numbers for prior months. Existing home sales also fell, due mainly to a decline in sales of condominiums. Conversely, July durable goods orders surprised on the upside, due largely to strong shipments of capital goods, excluding defense and aircraft, suggesting some momentum in business fixed investment.
Trading in European markets was also light last week and traders there were seemingly cautious in anticipation of guidance from central bankers attending the annual Jackson Hole symposium hosted by the Kansas City Federal Reserve. The pan-European Stoxx 600 index ended slightly higher. The London benchmark FTSE 100 Index closed the week higher, spurred by a weaker pound, which helps boost shares of multinational companies with earnings in other currencies, and a general uptick in the performance of UK-based companies. However, European equity funds logged their first outflow in seven weeks, according to fund flows tracked by EPFR.
In Asia, Japanese stocks posted mixed performance last week, with small-caps outperforming large-caps, while the yen weakened modestly versus the U.S. dollar. In China, the economy will expand more than previously forecast in the next few years, according to the International Monetary Fund, causing Chinese stocks to gap higher last week. However, the growth spurt will be accompanied by a higher-than-expected surge in governmental borrowing that could push China’s debt load to 300 percent of its overall economic output, raising the risk of a sudden downturn. The IMF’s latest outlook on China forecasts economic growth to average 6.4 percent from 2017 to 2021, up from a year-ago forecast of 6.0 percent average growth.