The WMA Weekly Market Wrap v.180918

September 18, 2018

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.


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