The WMA Weekly Market Wrap v.18090

September 4, 2018
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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.


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