The WMA Weekly Market Wrap v.180821

August 21, 2018

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.

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