The WMA Weekly Market Wrap v. 180619

June 19, 2018

Narrowly Mixed

The major domestic equity indexes ended last week narrowly mixed. A drop on Friday erased gains for the Dow and the S&P MidCap 400, while the tech-heavy Nasdaq and small-cap Russell 2000 indexes were able to remain in positive territory. The S&P 500 was virtually unchanged. The Nasdaq, S&P MidCap 400, and Russell 2000 all managed to set new record highs during the week before falling back Friday. Within the S&P 500, consumer discretionary and utilities stocks performed best, while energy, financials, materials, and industrials shares recorded steep losses.

Stock prices fluctuated within a small band for most of the week — a notable contrast to the volatility of recent months — as traders seemed largely unmoved by a series of important macroeconomic events and data. In particular, the summit between North Korea and the U.S., which resulted in a televised signing ceremony on Monday, seemed to have little impact on markets, perhaps because the details of North Korea’s promised denuclearization remain unknown or undetermined.

Stocks had a larger reaction to the Federal Reserve’s policy meeting on Wednesday. Fed officials decided to raise the federal funds rate by another 25bp, as expected, but stocks fell after policymakers offered a slightly more hawkish outlook. According to the Fed’s “dot-plot” survey of individual policymaker’s rate expectations, one more official now expects a total of four rate hikes in 2018, rather than three. Disquiet over the prospect of a faster pace of rate hikes in the U.S. may have been offset by a somewhat more dovish tone from the European Central Bank during the week. The Fed’s change in tone had more of an impact on emerging markets.

The week’s economic data was generally positive, which may have assuaged rate concerns. On Tuesday, the Labor Department reported that headline inflation in May had reached 2.8 percent on a year-over-year basis, its highest level since 2011. The rise in oil prices deserved much of the blame, however, and core inflation (less food and energy costs) remained roughly in line with the Fed’s target. Retail sales data delivered more of an upside surprise. Core retail sales (excluding sales at automotive dealers, building materials stores, and gas stations) rose 0.6 percent in May, while previous months were revised higher. Spending increases have been running ahead of income gains in recent months, causing a pickup in the use of credit and a decline in the savings rate.

Traders had a bigger reaction to international trade news on Friday. The Trump administration announced that it was following through with an earlier threat to impose tariffs on imports of $50 billion worth of goods from China, which came on the top of earlier announced steel and aluminum tariffs. China quickly promised to respond with its own tariffs on a similar scale, which seemed to take a large toll on materials and industrials shares. Notably, the producer price index rose 0.5 percent in May as large jumps in prices for steel and aluminum impacted the reading. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent threshold following the Fed meeting but ended slightly lower for the week.

Most European markets closed last week higher, boosted early in the week by bank, mining, and energy shares. Volumes were generally muted as traders apparently awaited news from the planned ECB meeting. The pan-European STOXX 600 finished nearly 2 percent higher, logging its biggest daily gain since last April, according to FactSet data, aided in part by a tumbling euro. By the end of the week, most key indexes lost ground as investors’ concerns about the escalating trade dispute between the U.S. and China intensified. The UK blue chip FTSE index ended the week flat.

In Asia, large-cap Japanese stocks posted gains, but small-caps edged lower. In China, the benchmark stock index ended last week at a its lowest level since September 2016, as traders fretted that the widening trade rift with the U.S. would weigh on the country’s growth. For the week, the benchmark Shanghai Composite Index shed 1.5 percent, its fourth weekly decline, while the large-cap CSI300 Index declined 0.7 percent. The declines in China came hours before the Trump administration announced that it approved tariffs on Chinese goods worth about $50 billion. Additionally, the U.S. has nearly completed a second list of tariffs on $100 billion in Chinese goods, Reuters reported on Friday.

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