Happy 10th Anniversary

In “honor” of the 10th anniversary of the onset of Great Financial Crisis (Lehman Brothers filed for bankruptcy protection ten years ago yesterday)…

From September 12, 2008 to March 9, 2009, the S&P 500 lost 45.15 percent, almost half its value, in less than six months. However, from that same September 12, 2008 to September 12, 2018, the S&P 500 gained back those losses and is up 185.9 percent more – 11.08 percent annualized overall – nearly tripling in ten years despite being down a huge amount right off the bat. Over shorter time horizons, stocks appear to be very risky. Over 10, 15, or 30 years, stocks look like a fantastic bet.

The stock market is a wonderful reallocation machine, moving money from those focused on today to those focused on their long-term goals, from the emotional to the dispassionate, from those who trade on gut feelings to those who use a systematic method, and from the greedy to the patient. So long as human beings price stocks, this will remain a fundamental function of the market.

Now on to the news, which is far less important.

Domestic stocks finished last week with decent gains, as shifting signals on potential protectionist trade policies between the U.S. and China seemed to be the primary market driver. Large-cap stocks outpaced small-caps, with companies in the transportation segment — which is part of the industrials and business services sector and includes railroad operators, trucking companies, and airlines — notably outperforming the broader market. Oil prices were volatile, with U.S. benchmark crude oil rising above the $70-per-barrel mark midweek before falling back.

Early in the week, worries about the Trump administration implementing its next round of planned tariffs — a 25 percent levy on $200 billion of Chinese imports — dampened sentiment. However, on Wednesday, headlines about Treasury Secretary Steven Mnuchin leading a new round of trade negotiations with China helped lift stocks off their intraday lows amid hopes that the talks would head off implantation of the tariffs (even though the President’s “reversal by Tweet” approach has damaged his credibility). The invitation from the U.S. administration to the Chinese government to discuss trade policy boosted stocks on Thursday despite a tweet from President Trump denying that the U.S. is under pressure to reach a trade deal with China.

The U.S. has already imposed 25 percent tariffs on $50 billion in Chinese goods, another $200 billion is teed up (as noted), and a couple of weeks ago President Trump said tariffs on yet another $267 billion in tariffs are ready to go and could be rolled out on short notice. That’s $517 billion. Over the past 12 months, the U.S. has imported about $529 billion in goods from China. States that are highly dependent on goods-producing industries and trade, including South Carolina, Indiana, and Michigan, would likely experience significant economic damage and employment losses. We will all pay more for Chinese products and U.S. goods that use Chinese components. This trade war could affect 11 million jobs. So news that the dispute might get settled is well received.

On Wednesday, technology bellwether Apple introduced a new line of larger iPhones and a revamped Apple Watch, with new functionality focused on monitoring the wearer’s health. The market cheered the relatively modest changes to the company’s device lineup, bidding Apple shares up following the event and for the week. Apple probably also benefited from an upturn in the broad technology sector, which outperformed the market for the week.

U.S. businesses had more than a half-million unfilled jobs in July, the Bureau of Labor Statistics reported Wednesday. That means we have 0.91 available workers for every job. The U.S. deficit grew by $222 billion from this time last year — reaching a total of $895 billion, according to the nonpartisan Congressional Budget Office. Median household income for Americans grew by 1.8 percent in 2017 to $61,400, with men and white Americans benefiting most, according to the newest Census data.

August consumer price index data showed prices rising 2.7 percent year-over-year, making it the first month in 2018 that YOY inflation eased. Producer price index data for August also showed more subdued inflationary pressure than earlier in the year. Dovish statements from regional Federal Reserve Bank Presidents James Bullard and Raphael Bostic, as well as former Fed Chair Janet Yellen, also supported hopes that the Fed may pause its rate hikes. The Fed’s next monetary policy meeting is scheduled for September 25–26. Yields on U.S. Treasury paper increased despite the dovish statements and soft inflation data, with the yield on the benchmark 10-year U.S. Treasury note touching 3.00 percent intraday on Friday.

Overseas, the Japanese stock market surged on Friday, in part due to the yen’s drop versus the U.S. dollar and closed at its best level since early February. China’s main stock indexes fell last week, as monthly indicators provided fresh evidence of slowing growth on the mainland. In Europe, the pan-European STOXX Europe 600 Index edged higher, buoyed by an easing of trade tensions between the U.S. and China. Auto and mining stocks led the gains.

[ctct form=”269″]

Shortened Week, Weaker Market

Domestic stocks declined in the Labor Day-shortened week ending Friday. In a reversal of recent trends, value stocks outperformed growth shares as the tech-focused Nasdaq lagged. Nevertheless, the value-oriented energy sector performed worst within the S&P 500 as oil prices fell sharply in response to rising U.S. inventories and concerns about demand from emerging markets. Still, the Russell 1000 Growth index outperformed the Russell 1000 Value index in August by the largest amount since February 2009, according to Bank of America Merrill Lynch.

Technology stocks were also weak last week, while industrials outperformed. Trading volumes picked up as the summer vacation season came to an end, and traders observed that much of the increased buying and selling early in the week took place in individual stocks rather than ETFs and futures – suggesting fewer traders were making wholesale moves in and out of stocks based on macroeconomic events and other thematic factors. A generalized “de-risking” and moving out of equities seemed to resurface on Thursday, however.

Technology and Internet-related stocks suffered a double blow during the week. On Wednesday, shares in Facebook and Twitter fell after executives from the two social media giants testified before Congress about efforts to curb foreign interference in U.S. elections through their platforms. Chinese Internet stocks also continued to suffer sharp losses, weighing on sentiment toward the broader group. On Thursday, semiconductor shares fell sharply after analysts lowered their price targets on Micron Technology, and fears grew about slumping demand from China and supply chain problems resulting from rising trade tensions.

The tech news wasn’t all bad. Amazon followed Apple to become the second U.S. company to reach $1 trillion in market capitalization last week, reflecting the online retailer’s striking transformation from a profitless bookseller into a disruptive force of commerce. AMZN was up an incredible 73 percent YTD at its high last week, increasing in value by over $400 billion in eight months. To put this number into perspective, the increase in AMZN shares is greater than the capitalization of 495 members of the S&P 500 and is roughly the size of Walmart, Costco and Target combined. To put it another way, just the increase in AMZN’s value would rank it as the thirtieth largest GDP in the world; the increase is about the same as Norway’s GDP. The total capitalization of AMZN would rank it as the sixteenth largest country GDP, eclipsing the GDP of countries such as the Netherlands, Turkey, Saudi Arabia and Switzerland. All this on (2017) revenues of only $177 billion, earning about $3.03 billion. For comparison, Walmart had 2017 revenues of $485.9 billion and earned $14.7 billion. Its revenue would make WMT the twelfth largest country in the world by GDP.

In related news, Sen. Bernie Sanders is the latest politician to take a shot at Amazon. The Vermont independent Socialist introduced a bill aimed at taxing big companies whose employees rely on federal benefits to make ends meet. Mr. Sanders specifically targeted Amazon founder and leader Jeff Bezos, contrasting his vast personal wealth with the compensation of the companies’ lowest-paid workers. President Trump, for different reasons, has also attacked AMZN. The markets have shrugged.

This month marks the tenth anniversary of the Great Financial Crisis. Twenty years ago last week, the search engine Google was incorporated as a company. Its parent firm, Alphabet, will perhaps be the next company to hit $1 trillion. It now has a market value of roughly $850 billion (see the chart below).

The U.S. trade deficit in goods with China and the European Union reached record highs in July. One factor: U.S. exports of soybeans fell sharply after the largest buyer, China, imposed retaliatory tariffs. Uncertainty about U.S. trade policy seemed to weigh on market sentiment generally last week. After falling apart the previous week, talks between Canada and the U.S. on a revised North American Free Trade Agreement appeared to make little progress. Meanwhile, traders braced themselves for the implementation of tariffs on another $200 billion in Chinese goods after the public comment period on the threatened tariffs closed on Thursday. Indeed, President Trump announced his plans to move ahead with these tariffs on Friday and threatened further action on another $267 billion if China retaliates. Altogether, the proposed tariffs would essentially cover all U.S. imports from China. In addition, reports surfaced that the Trump administration was next planning to set its sights on trade with Japan.

While evidence is mixed as to whether the trade dispute is taking a toll on the Chinese economy, signs are scant that it has had an impact on U.S. growth. The Labor Department announced on Thursday that initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 203,000 for the week ended September 1, the lowest level since December 1969, which was a very different time in that nearly 10 percent of that generation served in Vietnam, 550,000 in 1969 alone. The pace of hiring picked up in August, as nonfarm payrolls rose a seasonally adjusted 201,000 in August, the Labor Department announced Friday, a pickup from the prior month. American workers’ paychecks grew strongly and the unemployment rate held steady at 3.9 percent last month, showing ongoing strength in the labor market. U.S. employers have added to payrolls for 95 straight months, extending the longest continuous jobs expansion on record.

The economic data seemed to have little impact on stock prices, with traders appearing to accept that the wage inflation was not worrisome enough to provoke a faster pace of short-term rate increases by the Federal Reserve. The Fed is widely expected to hike official short-term rates when policymakers meet at the end of September. The positive jobs data contributed to a jump in longer-term interest rates, with the yield on the benchmark 10-year U.S. Treasury note briefly touching 2.95 percent, its highest level in nearly a month.

Across the pond, the pan-European Stoxx Europe 600 and Germany’s DAX 30 fell to their lowest levels in five months, as trade tensions and uncertainty about tariffs clouded the outlook for global trade. The unpredictability of the U.S. government in relation to trade is driving stocks lower, as it leaves companies uncertain about where to invest, while the overall global slowdown and high valuations of many European stocks have added to the impulse to sell. The MSCI Emerging Markets index is down more than 20 percent from its recent peak, officially putting it in bear market territory. Developing economies have been hit hard by a currency rout that began in Turkey.

In Asia, China’s benchmark stock index fell for the week, as traders braced for U.S. tariffs. For the week, the benchmark Shanghai Composite Index declined 0.8 percent, while the large-cap CSI300 Index fell 1.7 percent. The next rounds of tariffs, if they materialize, would mark a major escalation in the trade battle. Until now, the economic impact of the first $50 billion of U.S. tariffs on China has been relatively immaterial. In related news, a Chinese commerce ministry spokesperson warned Thursday of retaliation if Washington implements any new measures. Elsewhere on the Pacific Rim, Japanese stocks posted their largest weekly decline in over two months, weighed down by the effects of a severe typhoon and an earthquake on the northern island of Hokkaido.

Some additional market-related news that is significant but didn’t really move markets follows.

• A decade after the financial crisis, profits, assets and influence have moved from investment banks like Goldman Sachs to money-management giants like BlackRock and Vanguard. These firms, once sleepy clients (the “buy side”) of Wall Street (the “sell side”), are now its power brokers, directing huge flows of capital and capturing the lion’s share of the finance industry’s fees.
• The overall economic outlook looks fairly bright, but fall has often been a volatile stretch for global markets. Going back to 1945, the S&P 500 has notched its worst monthly return in September, and even optimistic investors and analysts seem guarded. Part of this uneasiness stems from the speed and scale of the stock market’s gains over the past few weeks, despite last week’s lull. The S&P 500 reached new highs after languishing in a narrow range for seven months, and the tech-heavy Nasdaq has risen even faster.
• Fully 94 percent of the net increase in all U.S. jobs between 2005 to 2015 was in gig, contract, free-lance or temporary work, according to research by Harvard’s Lawrence Katz and Princeton’s Alan Krueger.
• The economy is booming in some GOP-held battleground districts, data assembled by the Institute of International Finance shows. At the same time, a sizable number of competitive districts — almost all currently Republican — are vulnerable to new tariffs, a new cap on deductions for state and local income taxes or a jobs picture worse than the national average.

[ctct form=”269″]

August Closes Strong

Domestic stocks recorded solid gains last week, helping to bring most of the major indexes to all-time highs. The tech-heavy Nasdaq performed best and crossed the symbolic 8,000 threshold for the first time, while the narrowly focused Dow lagged and remained roughly 2.5 percent off the highs it established early in the year. Technology stocks outperformed within the S&P 500, and growth shares built on their substantial lead over value stocks for the year-to-date. Financials and telecommunications shares lagged. Trading was generally thin ahead of the Labor Day holiday weekend.

August was a very good month for domestic stocks overall, with the S&P 500 posting a 3 percent monthly rise, the Dow advancing 2.2 percent and the Nasdaq rallying 5.7 percent. Russell 2000 firms have reported second-quarter profit growth of 33.5 percent, according to a Stifel Nicolaus analysis of data. Small-cap earnings are also expected to grow at least 25 percent in three of the next four quarters. Small-cap stocks have outperformed recently, but the largest ones have too. Apple, Amazon, Alphabet and Microsoft, the four largest stocks in the S&P 500, are up an average of 22 percent since the index hit its record high of late January.

Take a strong economy, add a dollop of tax cuts, and you get very strong corporate profits. That recipe is working for U.S. companies, who saw their profits soar last quarter. The Commerce Department said Wednesday that its broadest measure of after-tax profits across the U.S. rose 16.1 percent in the quarter ended June 30 from a year earlier, the largest year-over-year gain in six years. Because of the lower corporate tax rate signed into law last year, taxes paid by U.S. companies in the quarter were down 33 percent from a year earlier, according to the government data, or more than $100 billion at an annual rate. Good economic news and robust corporate earnings reports have powered the stock market in recent weeks.

With the quarterly earnings reporting season nearly complete, the uncertain policy environment appeared to take a primary role in driving sentiment. Stocks enjoyed a strong start to the week on news that the U.S. and Mexico had agreed on a revised trade agreement. Hopes that Canada would join the agreement, despite a very short deadline for consideration imposed by President Trump, helped drive further market gains at midweek. The apparent breakdown of talks on Friday afternoon seemed to end the week on a down note, although further talks are expected next week. Stock-specific news did play some role, with heavily weighted Amazon rising on an upgraded analyst outlook and Apple gaining on news that Warren Buffett’s Berkshire Hathaway had increased its stake in the company.

Attempts by the Chinese government to prop up the country’s currency, also helped sentiment early in the week. The move was interpreted by some as a conciliatory gesture toward the U.S. — the declining yuan has made Chinese goods cheaper in the U.S. market while making U.S. goods less competitive in China. On Thursday, however, President Trump renewed his criticism of China’s foreign exchange policy and threatened a new round of tariffs, sending stocks sharply lower in afternoon trading.

The week’s economic data were generally supportive. As noted, the Commerce Department raised its estimate of second-quarter growth a bit, and inflation figures were generally in line with Federal Reserve targets. The yield on the benchmark 10-year U.S. Treasury note was roughly unchanged for the week.

The pan-European STOXX Europe 600 Index was relatively flat last week as traders focused on comments of the European Union’s chief Brexit negotiator, Michel Barnier, who said that the EU is willing to offer the UK an unprecedentedly close relationship after its exit. After joint talks, Brexit Secretary Dominic Raab said he was optimistic about striking a deal. Unresolved issues include agreements on intellectual property, data protection, and role of the European Court of Justice. Barnier’s suggestion of an “unprecedented partnership” gave the British pound a boost earlier in the week, but uncertainty persists.

A “hard” Brexit without an agreement has been one of the risks that have led to 25 straight weeks of outflows from European equity funds, according to Bank of America-Merrill Lynch. The outflows have wiped out all of 2017’s inflows. Italian budget worries, unimpressive economic growth, trade tensions, and the rise of nationalist parties have also put pressure on European stocks.

In Asia, the U.S.-China trade dispute threatened to turn more acrimonious after Bloomberg reported Thursday that the Trump administration is prepared to slap tariffs on $200 billion more of Chinese imports as early as September 6. President Trump plans to impose the tariffs after the deadline for a public comment period on the plan ends that day, Bloomberg reported.

If they materialize, the tariffs would mark a significant escalation in the months-long trade battle with China, whose currency has been hard hit by worsening trade relations. In the same interview, Mr. Trump repeated his claim that China has devalued its currency to make up for having to pay tariffs imposed by the U.S. Those comments contradicted those made by U.S. Treasury Secretary Steven Mnuchin, who earlier in the week praised China for supporting the yuan and said “that is not currency manipulation.”

The “FAANG-BAT” group of tech stocks advanced 68 percent in 2017. [Note:  FAANG is American and BAT is Chinese]. It was very hard to have good returns in 2017 if one did not own these issues. However, very roughly reflective of at least the Chinese markets thus far in 2018, FAANG is up about 37 percent while BAT is down about 5.3 percent. Even so, FAANG is now breaking down given the large missteps of both “F” (Facebook) and “N” (Netflix). In other words, return is even more focused thus far in 2018.

Despite a strong economy overall, fully 40 percent of American families struggled to meet a basic need last year — food, health care, housing or utilities — according to an Urban Institute survey.

·     23 percent of households struggled to feed their family at some point during the year.

·     18 percent didn’t seek care for a medical need because of the cost.

·     13 percent missed a utility payment.

·     10 percent didn’t pay the full amount of their rent or mortgage, or paid it late.

There are many ways to measure inflation in the U.S. One of the more important, the personal-consumption-expenditures price index excluding food and energy, hit a milestone in July. The core PCE price index rose 2 percent from the previous year, matching the Federal Reserve’s target. The overall index was up 2.3 percent annually, the biggest rise in over six years. Until recently, weak prices were puzzling given that the overall economy was growing and unemployment was very low. Now, however, the job market is stronger than it has been in nearly two decades, and Thursday’s data will likely bolster Fed officials’ belief that inflation is finally consolidating around the central bank’s objective. The stronger inflation numbers should reinforce expectations that the Fed will continue gradually raising interest rates in a bid to keep the economy from overheating.

The start of September marks the beginning of what is traditionally the stock market’s worst month. The S&P 500 has finished lower in 50 out of 91 Septembers, with an average return of negative 1 percent, according to Dow Jones Market Data.

[ctct form=”269″]

A Decent Week on the Home Front

Most of the major domestic stock indexes closed higher last week, as large declines on Wednesday were offset by a rally on Thursday. The tech-heavy Nasdaq lagged and recorded a modest loss. Consumer staples shares led gains in the S&P 500, but real estate and utilities shares also outperformed. Energy stocks retreated with oil prices and performed worst, hurt by a rise in U.S. inventories. The outperformance of the typically defensive sectors helped value stocks outperform growth stocks for the week; growth stocks remained far ahead YTD, however.

An increasingly clouded outlook for the global economy weighed on sentiment early in the week. Traders continued to worry about the recent sharp decline in the Turkish lira and whether it might spark a broader sell-off in emerging markets. Slowing growth in China was also a concern, and disappointing results from Chinese Internet giant Tencent Holdings appeared to play a large role in Wednesday’s sell-off, with the S&P 500 experiencing its largest pullback since late June. These fears seemed to dissipate late in the week, however, with news that China would be sending a trade delegation to the U.S. appearing to play a key role in Thursday’s rebound. Building on gains earlier in the week, the Turkish lira also stabilized on Thursday before falling back again on Friday.

The week’s economic data were generally supportive. Most notably, the Commerce Department reported on Wednesday that retail sales had increased a solid 0.5 percent in July. Core retail sales — which exclude sales at automotive dealers, gas stations, and building materials stores — rose even faster, driven by healthy spending at clothing stores, restaurants and bars, and online. Consumer spending fundamentals are sound, with wage income growing at an annualized pace of roughly 5 percent, while recent strength in the U.S. dollar is holding down import prices.

The strength of the American consumer was confirmed on Thursday by Walmart’s earnings report, which showed the best sales growth for the retail giant in over a decade. Walmart’s stock rose more than 9 percent as the market also rewarded rapid growth in the company’s online sales. JC Penney shares declined by nearly 27 percent on the same day, however, after the retailer reported a quarterly loss that was larger than expected.

The favorable economic signals failed to spark an increase in longer-term U.S. Treasury yields, due in part to a countervailing “safe haven” bid that resulted from concerns about the unstable global economic situation. Banks are finally starting to pay their depositors, however. The grim decade in which savers earned near nothing on their bank deposits seems to be ending. Banks have started raising deposit rates more rapidly in response to Federal Reserve rate increases, pressured by online competition. That is good news for consumers and bad news for some banks.

Key European stock indexes ended last week lower amid concerns about the health of Italian banks, Turkey’s currency crisis, and uncertainty about global trade policies. Mixed corporate earnings results also weighed on some sectors. The German DAX 30, which is highly reactive to global trade uncertainty, fell nearly 2 percent for the week. The pan-European STOXX 600 Index ended the week with a loss of about 1.5 percent. Midweek, the index posted its biggest one-day decline since late June, as uncertainty about Turkey seemed to be the cause. Spain’s IBEX 35 and France’s CAC 40 ended last week lower, as banks and industrial shares underperformed.

In Asia, China’s economy is cooling. Spending on factory machinery, public-works projects and other fixed-asset investments in China’s nonrural areas grew at the slowest pace in nearly two decades. Retail sales also slowed and unemployment ticked up. The economy is still expanding. But the data suggest further escalation in trade tensions with the U.S. come at a particularly bad time for China.

The Chinese yuan declined for the tenth-straight week, extending its record-long losing streak, but news that the U.S. and China will rekindle trade talks lifted expectations that selling pressure on the currency would ease. After hitting a 20-month low midweek, the offshore yuan — which is traded by international investors outside the mainland — rallied Thursday after China said that it would send a delegation led by its vice minister of commerce to meet with U.S. Treasury Undersecretary David Malpass later this month. The upcoming talks mark the first face-to-face meeting for U.S. and Chinese officials in over two months and offer the possibility of a breakthrough in the current trade dispute. Elsewhere on the Pacific Rim, Japanese stocks zigzagged during the week and ended with a modest loss.

[ctct form=”269″]

Mostly Flat and Quiet

Domestic stocks didn’t do much of anything last week. Financial shares outperformed within the S&P 500, helped by strong gains at midweek, while telecommunication services stocks lagged. Spurred by Amazon’s report of healthy “Prime Day” shopping revenues, the tech-heavy Nasdaq managed to set a record high early in the week before falling back. Trading volumes remained subdued throughout the week.

The second week of major quarterly earnings reports drove a generally directionless market during the week. Particularly notable was Netflix’s report of subscriber additions, which was well below the estimate the company had offered in April. The news sent the stock down as much as 14 percent in early trading Tuesday before it recovered somewhat. Analysts polled by both FactSet and Thomson Reuters are expecting overall earnings for the S&P 500 to have risen by around 21 percent in the second quarter versus a year ago, only a modest slowdown from the first quarter’s robust 25 percent gain.

The week’s economic data were generally favorable. Retail sales excluding the volatile auto and gasoline components rose 0.3 percent in June, and industrial production also posted large gains. Initial jobless claims fell to 207,000 for the week ended July 14, the lowest level since December 6, 1969, the day of the infamous Altamont music festival. However, both housing starts and new housing permits declined to their lowest rates since September 2017, with the former falling 12.3 percent in June and the latter down 2.2 percent.

On Thursday, President Trump sparked a brief rally in equities and a sell-off in the U.S. dollar after the release of a CNBC interview in which the president said that he was “not happy about interest rates going up.” Commodities — which are often priced in dollars and become less expensive to non-U.S. buyers when the dollar falls — also rose on the news. Whether Federal Reserve officials would adjust monetary policy in response seemed highly doubtful to most observers, however. On Friday, President Trump also further sharpened his trade rhetoric, threatening to put tariffs on all Chinese imports into the U.S., totaling over $500 billion. Markets appeared to shrug off the threat, however, despite new evidence from the Fed suggesting that the president’s new tariffs on intermediate inputs will have a significant negative impact on U.S. manufacturing.

Bond prices did not react dramatically to either of President Trump’s statements, but the yield on the benchmark 10-year U.S. Treasury note did end the week somewhat higher, at 2.89 percent. The 30-year U.S. Treasury bond closed the week yielding more than three percent (3.03 percent), the highest yield sine June. Meanwhile, the 2-Year U.S. Treasury note hit its highest yield level in 10 years last week (2.62 percent). The last time the 2-year was north of 2 percent, the 10-year U.S. Treasury note was yielding 100bp more and the 30-year U.S. Treasury bond was yielding 170bp more. Meanwhile, 15 countries still have negative yields as the ECB/Bank of Japan, Swiss National Bank, Riksbank (Sweden), and Denmark’s National Bank have yet to hike rates from all-time lows.

Key European stock indexes closed last week flat to lower amid the same news together with uncertainty surrounding Brexit negotiations. Mining and automotive stocks lost ground late in the week after President Trump’s newest tariff threats. Germany’s DAX 30 led losses across Europe. Germany is a major exporter, and the DAX 30 index has been highly reactive to global trade uncertainty. Bank stocks also fell following news that Mr. Trump hoped that the Fed would stop raising interest rates. Many European banks have operations or significant exposure to the U.S. market, and lower interest rates can crimp profits. The pan-European STOXX 600 Index held on to a slight gain for the week, boosted by positive reaction to a raft of positive corporate earnings results.

In Asia, Chinese equities hit a 10-month low, down 9 percent YTD and 23 percent from their January high. China’s currency sank versus the U.S. dollar on the trade tension news. On Wednesday, the yuan fell to its lowest level against the dollar since July 2017 in offshore trading, though it recovered on Friday after a large Chinese bank reportedly sold dollars to prop up the currency. The week’s decline adds to recent weakness in the yuan, which dropped about 5 percent in the second quarter. The yuan’s recent weakness raised speculation that Beijing is content to allow China’s currency to depreciate to hit back at the U.S. in the escalating trade battle, as a weaker yuan should help Chinese exports.

[ctct form=”269″]

Quiet and Volatile, but Better

Most of the major domestic equity benchmarks saw gains last week despite substantial volatility. The smaller-cap benchmarks and the tech-heavy Nasdaq managed to climb to new records, but the narrowly focused Dow performed best as large-caps outpaced small-caps. Trading volumes were subdued for most of the week as many seemed sidelined ahead of second-quarter earnings reports, which began in earnest on Friday. Within the S&P 500, information technology shares performed best, while utilities stocks lagged.

The ebb and flow of trade worries continue to dominate sentiment here and abroad. The lack of any bad news on the trade front over the previous weekend helped stocks get off to a strong start to the week, but stocks retreated as trade tensions rose again on Wednesday, following news that the U.S. was planning to follow through on a threat to impose tariffs on an additional $200 billion worth of Chinese goods. The lack of an immediate response from China was met with relief, however, helping stocks rebound on Thursday. Traders also seemed reassured by President Trump’s eventual affirmation of his commitment to NATO at the organization’s summit in Brussels.

The impact of ongoing trade disputes was evident in producer prices, which rose 0.3 percent in June, building on a 0.5 percent increase in May. On an annualized basis, producer prices rose 3.4 percent, their fastest increase in nearly seven years, according to Reuters. Increased costs for metals used in construction and manufacturing appeared to be behind much of the increase, suggesting that the steel and aluminum tariffs recently put in place by the Trump administration are driving up input costs.

Consumer price inflation remained more contained but also appeared to be inching higher. Consumer prices in June increased 2.9 percent over a year ago, the highest rate in six years and more than offsetting the 2.7 percent increase in average annual wages over the same period. Indeed, inflation concerns appear to be growing among Americans. In their latest survey of consumer sentiment, researchers at the University of Michigan noted that over half of Americans in the top third of the income distribution expressed concerns about the economic impact of tariffs.

European stocks were generally higher in yet another week punctuated by escalating trade tensions, as well as political uncertainty amid ongoing Brexit negotiations. Despite one of the biggest one-day drops in oil prices in two years, the fallout from such a sharp move was muted in other markets. Midweek, trade war talk ratcheted up after the U.S. announced it aimed to apply a 10 percent tariff on $200 billion of goods in retaliation for China’s earlier retaliatory tariff action against U.S. goods. European stocks, particularly shares of basic resources companies, sank on the news, but the market moved toward recovery in the absence of an immediate response from China. The pan-European STOXX 600 Index ended the week less than one percent higher.

In Asia, Japanese stocks saw their best weekly gain in six months. In China, stocks gained as well, with trading closely tied to American price action. Many in Asia think that it is possible that relations between the U.S. and China may improve in the near-term. However, the path toward an ultimate trade agreement seems narrower and more uncertain than it had been.

[ctct form=”269″]

Quiet But Better

Domestic stocks were volatile but better during last week’s abbreviated trading. Volumes were predictably low, especially on the two days surrounding the July 4 holiday. Continuing the pattern of recent months, the tech-heavy Nasdaq and the smaller-cap benchmarks outperformed. Health care stocks were particularly strong within the S&P 500, while financials shares lagged.

The market opened the week lower, following steep overnight losses in Asia as a measure of Chinese manufacturing activity came in below expectations and trade war worries continued to weigh on sentiment. A stronger-than-expected report on U.S. manufacturing activity may have helped turn markets around, however, and stocks ended Monday with a gain. The momentum carried into early Tuesday, but stocks later gave back their gains in the shortened trading session.

Momentum picked up again when trading resumed on Thursday, but volumes remained well below normal as many traders enjoyed an extended holiday. Many others were reluctant to act in advance of the U.S. imposition of tariffs on China on Friday, as well as the Labor Department’s important monthly jobs data report. Those who were involved pushed the S&P 500 to its best daily gain in a month, with sentiment seemingly helped in part by a strong service sector activity reading.

Friday’s payrolls report came in a bit stronger than expected, helping end the week on a positive note. The U.S. created 213,000 new jobs in June, better than consensus, and another hearty gain that suggests that companies are finding ways to fill open jobs despite a dwindling pool of skilled workers. In a surprise, the unemployment rate rose to 4 percent last month after dropping to an 18-year low of 3.8 percent in May, largely on account of 600,000 people entering the work force. Since more Americans look for jobs when they are seen as easier to find, this was taken as another sign of labor market health. The number of people who were unemployed also grew by half a million, but the increase was likely tied to the end of the school year when students enter the workforce. The shrinking pool of labor is slowly forcing companies to raise pay as the competition for talent intensifies, but they are still generally managing to keep labor costs down, with wages staying roughly flat over the past year when taking account of inflation.

On Thursday, the Federal Reserve released the minutes of its June 12-13 policy meeting. They revealed that policymakers had shifted their perceived distribution of risk away from the upside and indicated that Fed officials now believe risks to economic growth appear more broadly balanced. The Fed also highlighted the possibility that growing trade frictions would weigh on business sentiment and investment spending. Policymakers also voiced concerns over the potential downside risks to economic growth and inflation due to economic developments in Europe and emerging markets.

Neither the Fed minutes nor the important payroll data had a large impact on long-term interest rates, with the yield on the benchmark 10-year U.S. Treasury note decreasing slightly for the week.

European equities ended last week mixed as trade talk continued to dominate market sentiment. Markets began the week in negative territory as President Trump threatened withdrawal from the World Trade Organization and emphasized that his next tariffs would likely target automobiles. The EU countered with threats to levy measures on nearly $300 billion of U.S. goods. Banking, mining, oil, and automotive shares traded in negative territory early in the week before gaining ground after trade tensions eased following a positive reception from lobbying efforts and proposals for the EU and the U.S. mutually to lower tariffs. Market sentiment tilted toward a more cautious and defensive tone by week’s end, with utilities and food company stocks among the gainers. The pan-European STOXX 600 ended the week up by less than 0.5 percent, while the UK’s blue chip FTSE 100 logged a decline.

In Japan last week, the Nikkei suffered its third straight losing week and dipped to a three-month low on Thursday before rallying about 1 percent on Friday. Banks and tourism-related companies sold off on concerns about the implementation of U.S. tariffs on Chinese goods. Several of the major Japanese banks fell to their lowest levels since late 2016. Retailers were also punished as traders dumped the group on speculation that Chinese tourist activity would decline.

Elsewhere in Asia, China’s main stock indexes extended a stretch of weekly losses as trade tensions with the U.S. ratcheted up. For the week, the benchmark Shanghai Composite shed 3.5 percent for its seventh straight down week, while the large-cap CSI300 fell 4.2 percent, its fifth weekly decline in a row. Friday’s decline pushed the Shanghai deeper into bear market territory, off nearly 23 percent from its January high.

The U.S. imposed tariffs on $34 billion of Chinese products, effective Friday at midnight, which prompted China to hit back with similarly sized tariffs on U.S. products. News that the U.S. is following through on its threat to levy tariffs on an initial round of Chinese products marks an escalation in U.S.-China trade tensions. Nonetheless, the immediate economic impact of both sides’ tariffs will be relatively small — just 0.1 percent of each country’s respective GDP.

[ctct form=”269″]

Trade War Leads to Lousy Week

Domestic stocks had a lousy week. The tech-heavy Nasdaq and the smaller-cap benchmarks fared worst after outperforming the previous week. Within the S&P 500, energy stocks performed best as oil prices reached new four-year highs. Health care and consumer staples shares lagged, dragged lower by drug store operators amid concerns that Amazon’s acquisition of an online pharmacy could lead to intense price competition and possibly smaller profit margins for the sector.

The markets began the week on a markedly down note. On Monday, the S&P 500 suffered its worst daily decline in nearly three months while the Dow closed below its 200-day moving average for the first time since immediately after the surprise Brexit vote in 2016. Trade concerns were at the root of the problems, with traders concerned about new threats from the Trump administration to block Chinese access to U.S. technology. The Wall Street Journal reported on Monday that administration officials were planning to bar Chinese firms from investing in U.S. technology companies and to impose new limits on U.S. technology exports to China.

Trade worries deepened later Monday and into Tuesday after Harley-Davidson revealed in an SEC filing that it was planning to move some of its motorcycle production overseas to avoid retaliatory tariffs recently announced by the European Union. President Trump responded by harshly criticized the company in a series of tweets.

The president seemed to moderate his rhetoric at midweek, however, which may have helped the market recover somewhat. On Tuesday afternoon, Mr. Trump told a group of White House reporters that the government would continue to rely on the Committee on Foreign Investment in the United States in limiting Chinese investments in U.S. technology. On Thursday, the president spoke in Wisconsin at the opening of a plant operated by Taiwanese technology giant Foxconn — a source of foreign investment in the U.S. that he had celebrated early in his administration. Traders observed that his address was notable for its benign tone, with the president emphasizing how all the threats and hyperbole surrounding trade are part of a negotiation that will ultimately prove successful. The president also implied that the EU has reached out to discuss a compromise.

On a sector basis, notable developments during the week included the sharp rise in oil prices, which appeared to result from both falling U.S. supplies and reports that the Trump administration was aiming to shut down all Iranian crude exports by November 4. The higher prices boosted energy stocks, but traders noted that the rally in crude oil may have also weighed on the stocks of oil consumers. Financial shares helped lead an early rally Friday, as traders seemed to be relieved that all major U.S. banks cleared the Federal Reserve’s annual stress tests. A positive earnings surprise and favorable guidance from Nike also helped the major indexes move higher.

Bloomberg reported that companies in the S&P 500 rely upon foreign markets for about one-third of their revenue. According to Bank of America/Merrill Lynch, the current rise in tariffs will negatively impact S&P 500 profits by three to four percent. Goldman suggests a two to three percent decline. In any event, the impact is significant. Tech stocks have dominated market performance since 2016; foreign sales account for nearly 60 percent of their revenues. The next highest group within the S&P is the industrials sector at 38 percent of revenues.

The week’s economic signals were mixed. New home sales jumped in May, but housing prices softened. New durable goods orders fell 0.6 percent month-over-month in May, with core capital goods falling 0.2 percent, as orders were lower across the board. Growth in first-quarter gross domestic product was revised lower, from 2.2 to 2.0 percent, as small contributions from inventory growth and net exports were reduced and became drags on the estimate. Weekly initial jobless claims rose slightly but remained at historical lows. Personal income rose 0.4 percent in May and consumer spending rose 0.2 percent, both in line with estimates. The Atlanta Fed increased its estimate of second quarter GDP growth to 4.5 percent as we reached the six-month “anniversary” of the president’s tax cut plan. Other forecasters boosted their forecasts to 5 percent. The only time growth has topped 5 percent since 2003 was the third quarter of 2014, when the economy grew by 5.2 percent. The yield on the benchmark 10-year U.S. Treasury note decreased over the week.

Key European stock indexes also ended the week lower, weighed down by uncertainty about global trade and political wrangling over immigration. Trade volumes were down significantly at the beginning of the week, an indication of uncertainty about the direction of the markets. The pan-European STOXX 600 Index logged about a 1 percent loss and the export-heavy German DAX 30 was lower by close to 2 percent. Most of the losses came early in the week as traders seemed worried that a global trade war would drag down the European economy. Some of the heated trade rhetoric between the U.S. and European countries as well as China softened as the week progressed, as noted above, fueling a partial recovery in equities.

In recent weeks, investors have withdrawn billions of dollars from European equity and bond funds, concerned that trade frictions could dent a fragile economic recovery in a region heavily exposed to international trade. During recent sessions investors have been weighing signals from the U.S. and China about the future of their trading relationship, which some worry could hurt the outlook for growth.

In Asia, the Shanghai Composite Index, China’s benchmark stock index, lost 1.5 percent last week despite a sharp bounce higher on Friday after the country officially announced that it would further open its markets to foreign investment. The large-cap CSI300 Index fared worse, falling nearly 3 percent. June was the worst month for Chinese stock returns in more than two years, and both the Shanghai Composite and the CSI300 were among the poorest-performing major indexes in the world YTD. As in the rest of the world, but worse, fears of a trade war with the U.S. continued to weigh on investor sentiment toward China. Japanese stocks also lost about one percent last week.

[ctct form=”269″]