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The Dow crossed through the 22,000 level for the first time ever last week to grow 1.2 percent and has now hit new highs on eight straight days, but much of the street talk centered on stock valuations. The S&P 500 was up only marginally – it has now gone 12 days without a move of 0.3 percent in either direction, the longest such streak on record – while the Nasdaq was down 0.4 percent. Small caps lagged even more. Pretty much everyone concedes that stocks are at least a bit overvalued, but (as has been the case for quite a long time) nothing else looks cheap. Moreover, the range of valuations remains wide. Just looking at the 30 stocks in the Dow shows a valuations range from nearly 40 percent overvalued (Caterpillar) to about 20 percent undervalued (GE). A strong earnings report from Apple helped to push the Dow over the line.

If you are looking for something more short-term to worry about, recall that Congress has yet to raise the government’s debt ceiling. It is estimated that the U.S. Treasury will run out of money on September 29. A Republican Congress and a Republican president should mean that the debt ceiling will be a non-issue, but the high level of dysfunction in Washington suggests that no deal should be assumed. Traders aren’t using the debt ceiling as a reason to sell just yet, but with stocks trading near all-time highs and valuations also high, few are aggressively buying either.

A solid employment report on Friday offered some relief after a week of mostly negative economic news, even if it didn’t bring much of a market pop with it. Car sales remained the biggest downer, with significant sales declines and inventory growth despite some healthy incentives. June consumption data was also unusually disappointing, with almost no growth at all between May and June. Wage and income data from the same report also continued to slump year over year. Pending home sale, construction spending, and ISM Purchasing Manager surveys also managed to disappoint. Jobs, on the other hand, showed another month of growth (209,000 jobs) in excess of the 12-month average and the consensus forecast. July was the 82nd consecutive month of job growth. The unemployment rate fell to 4.3 percent, matching a 16-year low.

Bond yields trended lower again, further indication of traders being less than all-in on stocks. Most analysts look for the Federal Reserve to tighten policy, starting the process of shrinking its balance sheet at its September policy meeting and raising its federal-funds rate target another quarter-point in December. The fed-funds futures market remains unconvinced on the latter, however, seeing only a 40 percent probability of such a move, according to Bloomberg.

Healthcare reform looks dead, at least for now, but healthcare costs remain. A healthy 65-year-old couple retiring this year can expect to spend $322,000 (in today’s dollars) on Medicare premiums and dental insurance during their retirement, according to Healthview Services. Add deductibles, co-pays, hearing, vision, and dental cost sharing, and that figure rises to $404,000.

Foreign stocks continue to outperform as developed nation, emerging market, European, Chinese and Japanese stocks all had good weeks. India continues its spectacular performance, up over 1.5 percent last week and over 30 percent in 2017. Valuations are much cheaper overseas than in the U.S., which is a major point for many.

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Most of the major domestic stock benchmarks ended the week modestly lower, with the Dow being the prominent
exception. The market received a boost from energy stocks, as oil prices advanced following the promise of
production cutbacks by Saudi Arabia. Real estate-related shares also performed well. Health care stocks fared
poorly, weighed down in part by a steep drop in AstraZeneca shares following disappointing test results for its new
lung cancer drug. Health care service providers also performed poorly for much of the week as uncertainty
persisted about Obamacare’s survival and related changes to health care regulations.

Last week’s trading started slowly, with volumes Monday among the lowest of the year so far. Trading picked up
later in the week, with players paying attention to the Federal Reserve’s statement on Wednesday following its
policy meeting. The statement included no rate hike, as expected, but revealed that the Fed intended to begin
reducing its holdings of mortgage-backed securities and U.S. Treasuries “relatively soon,” which might put upward
pressure on longer-term interest rates and the mortgage bond markets. The Fed had previously outlined its plan to
draw down its holdings by not reinvesting all of its principal payments on these securities, a process expected to
begin this fall.

Market activity spiked further on Thursday, the busiest day for second-quarter earnings releases, as 74 S&P 500
companies reported results and 380 firms reported overall. The AstraZeneca test results also captured attention
and weighed on the market. Traders noted that the biggest driver of sentiment, however, appeared to be a
research note from a JPMorgan strategist, who warned that current low levels of market volatility were reminiscent
of periods just before previous bear markets.

The week’s economic data were mixed and appeared to have minimal impact on stock prices. Existing home sales
declined in June, held back by low inventories, while new home sales and housing prices rose. The Conference
Board’s gauge of consumer confidence defied expectations and increased. Less encouraging news came from the
manufacturing sector, with core (excluding commercial aircraft and defense) capital goods orders contracting
slightly in June. On Friday, the Commerce Department released its initial estimate of second-quarter growth, which
showed GDP expanding at an annualized pace of 2.6 percent, slightly below expectations. The previous quarter’s pace was revised lower, to 1.2 percent. Longer-term U.S. Treasury yields rose last week. Credit spreads compressed due to a combination of light new issuance and strong demand.

Across the pond, the busy week of corporate earnings injected volatility into the major European indexes. Soft
manufacturing data releases, notably in Germany and France, weighed on the market early in the week. However,
by midweek, as earnings season was in full swing, telecom, tech, and utility stocks led the markets higher. With
about one-third of companies having reported, earnings and sales results are tracking slightly ahead of estimates.
Even so, European traders were somewhat disappointed that, so far, second-quarter earnings results compared
poorly with the strong earnings results seen over other recent quarters. By the end of the week, European tech
stocks, hurt by earnings misses and profit taking, were a drag on Germany’s Dax and France’s CAC 40. The pan-
European index Stoxx 600 finished the week lower too. The ruble fell against the U.S. dollar last week after the U.S.
Congress agreed to impose new sanctions on Russia to punish it for its interference in last year’s U.S. presidential
election.

The Japanese stock market benchmarks fell modestly last week while the yen was little changed versus the dollar
and stayed above ¥111 per buck, about 5.0 percent stronger than at the end of 2016. Elsewhere in Asia, China’s
economy is starting to lose growth momentum following recent tightening actions by the government. Forecasts of
slower growth in China for the rest of 2017 have become the consensus as Beijing has issued a slew of surprising
economic reports in recent weeks. Meanwhile, Congress imposed separate sanctions measures against Iran and
North Korea, with little market impact.

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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.

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The major domestic equity benchmarks posted mixed performance last week, but were mostly lower. The smaller-cap indexes, which are typically more volatile, declined, while some of the larger-cap benchmarks recorded a modest gain. MarketWatch and the WSJ Market Data Group reported that the Dow and the broader S&P 500 had recently experienced their lowest correlation since 2003, due mainly to the larger representation of tech stocks in the S&P.

Trading volumes were predictably very light early in the week, given the abbreviated trading session on Monday and the Fourth of July holiday on Tuesday. Stocks recorded modest gains on the back of those light volumes, with tech shares, which have recently been exceptionally volatile, bouncing back on Wednesday.

Sentiment soured and prices plummeted on Thursday, which caused the S&P 500 to record its worst daily decline since May, although trading volumes remained moderate. The generally accepted reasons were several. U.S. Treasury yields had been higher for seven of the previous eight trading days and minutes from the Federal Reserve’s June meeting, released the previous afternoon, did little to change expectations that a third rate hike was coming this year. Minutes from the recent European Central Bank policy meeting similarly weighed on markets after revealing some discussion about removing their easing bias (see below). Finally, on the geopolitical front, markets were not receptive to President Trump’s warning of “pretty severe things” that could happen in response to North Korea’s successful intercontinental ballistic missile test.

Friday brought the monthly jobs data and some reassuring news that helped stocks regain a bit of ground. The Labor Department reported that employers had added many more jobs than anticipated in June, helping reverse a string of disappointingly small monthly increases. A rising number of aggregate hours worked suggests that labor income is increasing at a more substantial pace. Even the tick up in the unemployment rate, to 4.4 percent, was seen as good news in that it suggests that job-seekers are returning to the job market.

While payroll gains were broad-based and boosted by the biggest jump in government jobs in almost a year, wages were below forecasts, even with the jobless rate close to the lowest since 2001. Nevertheless, the report marks a relatively strong finish for the labor market in the second quarter that should support continued gains in consumer spending in the coming months. Fed policy makers raised interest rates last month and reiterated plans to start reducing their balance sheet and increase borrowing costs once more this year.

Longer-term U.S. Treasury yields did not move substantially in response to the jobs report but increased for the week. Moves during the short trading week were the result of mixed economic data, the negative influence of European debt issuance, and volatility in oil prices.

European stock markets ended the week in slightly negative territory – a hangover from a global equity sell-off that followed new signs that central banks could be leaning toward tightening fiscal monetary policy. Minutes from the ECB’s June meeting published on Thursday showed that policymakers had considered whether to withdraw the ECB’s pledge to increase the pace of its bond-buying program if needed to boost the economy. Following the release, 10-year German bund yields increased to over 0.56 percent at Thursday’s close. The Pan-European index Stoxx 600 ended flat for the week.

In Asia, Japanese equities also declined last week. However, Japanese Foreign Minister Fumio Kishida and European Union Trade Commissioner Cecilia Malmström confirmed an outline for an Economic Partnership Agreement. The free trade deal, which stands in stark contrast to President Trump’s promised protectionism, was inked by Prime Minister Shinzo Abe and European Council President Donald Tusk on Thursday after having been in the works since 2013. Although the details of the EPA will not be finalized until later in the year, the agreement is expected to remove tariffs over a multiyear period on 95 percent of traded goods among the participants. That result would be a significant boon to the involved economies and to the markets there.

China’s foreign currency reserves rose for the fifth straight month in June, aided by the government’s efforts to stop money from leaving the country and a weak U.S. dollar. The string of monthly gains in China’s cash reserves shows that Beijing has been largely successful in controlling capital outflows and supporting the yuan in the near term, despite expectations for the currency to weaken over time.

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