Mixed Messages, Mixed Week

The major domestic equity indexes closed mixed for a second consecutive week, with the technology-heavy Nasdaq Composite recording a solid gain, while most other benchmarks suffered declines. Along with tech stocks, consumer discretionary shares outperformed within the S&P 500, while materials and financials shares declined. Similarly, faster-growing, higher-valuation growth stocks handily outperformed value. Last week saw a number of positioning trades on the part of pension funds and other institutional investors ahead of the end of the third quarter. Friday brought the unveiling of a new communication services sector within the S&P 500, which replaces the small telecommunication services sector and encompasses several Internet-related firms formerly categorized within either the consumer discretionary or information technology sectors, including Alphabet (parent of Google), Facebook, and Netflix, which all have heavy weights in the new sector.

Macroeconomic and policy concerns continue to play a large role in driving the market. As new tariffs on imports from China took effect Monday, the escalating trade conflict weighed on sentiment, especially after Chinese officials stated that they would not attend high-level talks in Washington. Accusations from President Donald Trump that China was attempting to interfere in the U.S. midterm elections and worries that Mr. Trump might fire Deputy Attorney General Rod Rosenstein may have also unsettled traders. One prominent stock-specific development was the announcement of an SEC civil suit against Tesla CEO Elon Musk, which sent shares of the electric automaker down by roughly 12 percent in early trading Friday.

The Federal Reserve announced it would raise short-term interest rates by another quarter-percentage point last week, and Fed officials signaled they want to continue lifting them through the next year to keep a strong economy on an even keel. Officials voted unanimously on the increase, which will bring the benchmark federal-funds rate to a range between 2 and 2.25 percent. Most officials expect to raise rates one more time this year, according to projections released after the meeting. This increase was the third this year and the eighth since the Fed began to lift rates in late 2015, after keeping them pinned near zero after the 2008 financial crisis. The Committee boosted its GDP growth forecast for 2018 and 2019. However, the FOMC’s “longer-run” U.S. GDP growth forecast (after the impact of the tax cuts have dissipated) remains below 2 percent. There was also a slight adjustment to next year’s consumer inflation expectation.

One additional development that gathered notice was the absence of the word “accommodative” in the Fed’s description of the stance of current monetary policy. Most analysts still believe that Fed officials view their stance as generally accommodative, however. When accounting for inflation, the current fed funds rate is barely positive. Moreover, as noted above, policymakers stress that they expect to continue raising rates — an unlikely assurance if they believed that they were removing accommodation and slowing the economy.

Longer-term U.S. Treasury yields decreased slightly for the week, although the benchmark 10-year U.S. Treasury note briefly touched a four-month high of 3.11 percent on Tuesday. A drop in yields on Wednesday appeared to be due in part to dovish comments on inflation from Fed Chairman Jerome Powell following the central bank policy meeting. The lack of any changes in the “dot-plot” survey of individual policymakers’ expectations for future interest rates may have also played a role.

After rising for much of the week, European stocks lost ground after Italy’s coalition government agreed to a wider-than-expected 2019 budget deficit goal of 2.4 percent, triple what the previous government had planned. The decision essentially puts the country on a collision course with the European Union, which had urged Italy to rein in its spending. The deal will likely prompt all three major credit ratings agencies to downgrade Italy and put it on negative watch, which could add to the selling pressure on Italian assets.

European markets have been volatile for months since the populist coalition partners suggested that they might breach EU deficit targets to fulfill campaign promises, but the deficit target was wider than markets expected. Following the announcement, the 10-year Italian government bond yield rose as high as 3.26 percent. On the week, the pan-European STOXX Europe 600 Index fell slightly, but Italy’s FTSE MIB Index dropped about 4 percent. The euro also sold off and finished the week about one percent lower against the U.S. dollar.

In Asia, China’s main stock indexes rose for the second week in a row as proposals from competing index providers to include more yuan-denominated shares into global portfolios offset the latest round of U.S. tariffs taking effect. For the week, the benchmark Shanghai Composite Index added 0.9 percent while the large-cap CSI300 Index rose 0.8 percent. Mainland Chinese markets are closed the first week of October for the National Day holiday.

Elsewhere in Asia, Japanese stocks posted solid gains in the holiday-shortened trading week (the Tokyo Stock Exchange was closed on Monday for Autumnal Equinox Day, which celebrates the arrival of fall). For the week, the Nikkei 225 Stock Average advanced 250 points (1.05 percent) and closed up 5.95 percent YTD. The broad-based TOPIX Index and the TOPIX Small Index also rallied for the week, but their returns YTD are still slightly in negative territory.

In the decade since the global financial crisis, people around the world are understandably far more bullish about the state of their economies than they were in the aftermath of the crisis. For example, in the U.S., 65 percent believe that the economy is in good shape, compared to 17 percent in 2008. However, in a dramatic shift from the past, many in the developed world doubt the good times will last for the coming generation. Only around one-third of respondents in the U.S., Germany, and Sweden think their children will be better off economically than they are. That number is just 25 percent in Canada and the U.K., and 15 percent in France and in Japan. Answers vary widely in emerging economies, but India (66 percent), Nigeria (65 percent) and Indonesia (75 percent) are particularly optimistic.

Other news and notes follow.

• The share of the world in extreme poverty is shrinking.
• Last Monday, oil topped $80 for the first time since May and logged its highest settle since November 2014. The global benchmark is up 21 percent in 2018.
• Nike shares, up 35 percent this year, have climbed 18 percent since the athletic-apparel maker’s previous earnings report and have risen 3 percent since the company rolled out its new advertising campaign with NFL quarterback-turned-activist Colin Kaepernick.
• Ten years ago last week, in the depths of the financial crisis, federal regulators seized Washington Mutual and struck a deal to sell the bulk of its operations to JPMorgan. It was the largest bank failure in U.S. history.
• Silicon Valley tech giants can’t be trusted to police themselves and should be subject to tougher regulation, according to a critical new report.
• President Trump signed a revised free-trade pact with South Korea, his first successful effort to open rather than close off trade channels, albeit only modestly.
• About 70 percent of Americans say it’s “very important” or “somewhat important” to buy American-made goods. But only 21 percent would pay 10 percent more for an American-made product and only 7 percent said they would pay 50 percent more, according to a Reuters/Ipsos poll.
• The economic outlook among chief executives of America’s largest companies cooled slightly in the third quarter, as confrontational U.S. trade policies weighed on planning for capital spending and hiring.
• A spike in U.S. mortgage rates on account of rising interest rates is spooking traders in some market sectors. While mortgage rates are still low by historical standards, a sharp increase combined with rapidly rising home prices can substantially dampen demand.
• The September Richmond Fed regional manufacturing index hit its highest level on record. U.S. factories are firing on all cylinders.
• The Conference Board’s consumer confidence index touched its highest level since 2000, driven by a booming jobs market.

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A Chartastic Week

As I noted last week, 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.

Below is a list of the five *BEST* performing stocks since the start of the recovery together with their largest drawdowns during that time (in other words, *NOT* including the worst of the crisis). Over the past ten years (all annualized), PATK has earned 37.30 percent per year; JAZZ has earned 40.90 percent; MGPI has earned 35.92 percent; SNBR has earned 34.59 percent; and GTT has earned a whopping 53.66 percent. $100,000 invested in those five stocks ($20,000 each) would have turned into roughly $3 million in just ten years.

Let’s suppose that you had purchased these fantastic performers at the bottom of the market — March 9. 2009 — as described above. Now look at the drawdowns noted above on those great stocks and ask yourself, “Could I have really held on to these stocks when they declined by so much?” For almost all of us, the obvious answer is, “No!” — which goes a long way toward explaining why investing successfully is so hard.

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

The major domestic stock benchmarks were mixed last week. The large-cap Dow Jones Industrial Average and the S&P 500 outperformed and reached all-time highs, while the technology-focused Nasdaq Composite and the smaller-cap benchmarks recorded modest losses. A sharp increase in longer-term bond yields early in the week boosted financials stocks by improving bank lending margins but weighed on real estate investment trusts and utilities shares, whose relatively high dividends became less compelling in comparison. The strong performance of financials and the relatively weak performance of techs helped value stocks outperform their growth counterparts for the first week in over a month, although growth stocks remained well ahead of value stocks YTD.

The S&P 500’s biggest gainers this month include telecommunication-services and consumer-staple companies — so-called safer sectors, typically favorites when markets are volatile or declining but laggards during rallies. Many of the shares that powered indexes to highs earlier in 2018 have tumbled this month, including Apple, Amazon and Alphabet, all down at least 4 percent, and Facebook, off more than 7 percent.

Last week brought further escalation in the trade conflict between the U.S. and China, but it appeared to weigh on sentiment only briefly. Stocks fell sharply on Monday afternoon, mostly attributed to reports that the White House would soon make another tariff announcement. Indeed, after the close of trading, President Trump delivered on a threat that he made in August and declared that $200 billion worth of Chinese goods would immediately be subject to a 10 percent tariff, rising to 25 percent by the end of the year. The next round came on top of $50 billion worth of Chinese goods already subject to new tariffs this year.

In a pattern that surprised many, stocks rose solidly when trading began Tuesday and carried the momentum through much of the rest of the week. Traders may have been mollified by the low 10 percent level of the initial tariff, which some interpreted as a sign of a willingness to negotiate on the part of the administration. China seemed to offer its own olive branches, as Chinese officials indicated that they would not allow the country’s currency, the yuan, to devalue further. The yuan has declined over 8 percent versus the U.S. dollar since April, making China’s goods more competitive on world markets and largely offsetting the impact of a 10 percent tariff. Chinese officials also announced a series of measures to open China’s markets to foreign goods, such as reducing the time it takes goods to clear customs.

In reality, tariffs on Chinese goods are a tax on American producers that use them, a tax that is passed through to consumers. A buying spree by consumers and businesses looking to get ahead of the tariffs could add another distortion to an economy already revved by up a big stimulus and tax cut and already facing a tight jobs market and rising prices. However, Oxford Economics estimates that U.S. gross domestic product growth could drop by a full percentage point next year if the U.S. tops off the current $250 billion with another $267 billion in tariffs. With the economy expected to grow at a 2.4-2.8 percent pace (according to Federal Reserve and Congressional Budget Office estimates), that’s a significant drag.

Sentiment may also have received a boost last week from solid U.S. economic data. Weekly jobless claims, reported Thursday, fell to 201,000, the lowest level in half a century. Regional manufacturing indexes were also strong. Housing data were more mixed, with housing starts jumping in August but new permits falling, suggesting some weakness ahead.

The federal government ran a deficit of $214 billion in August, the fifth largest deficit for any single month in history. The CBO is suggesting a FY 2018 deficit of $800 billion, the largest annual deficit since FY 2012. Growth is accelerating because of President Trump’s tax cut but so are federal revenues. Tax receipts are at record highs, eclipsing last year’s record. But spending is also at a record. Moreover, according to the CBO, federal revenues in FY 2019 should increase by 4.6 percent but spending will be up about 8 percent.

The yield on the benchmark 10-year U.S. Treasury note touched 3.10 percent on Thursday, its highest level in four months, before falling back a bit on Friday. Most analysts believe that the Fed is all but certain to raise short-term interest rates when it meets on September 25-26.

European stocks brushed off trade tensions and Brexit woes and rode the coattails of the U.S. stock rally. The pan-European STOXX Europe 600 Index rose about 1.6 percent, lifted by financials, mining, and oil stocks. In Asia, China’s main stock indexes rallied as promises from Beijing to stimulate domestic consumption outweighed the next round of U.S. tariffs. Japanese stocks posted strong gains in a holiday-shortened trading week.

Other news and notes follow:

• Despite controversy and aggressive attacks from President Trump, Nike shares are up 35 percent for the year and near all-time highs.
• In the last year, Amazon earned 50 cents of every dollar spent online in the U.S. At nearly $1 trillion, its market cap grew to triple the combined value of Sears, JCPenney, Best Buy, Macy’s, Target, Kohl’s, Nordstrom and Walmart.
• The number of investors who expect global growth to slow in the coming year has risen to its highest level since December 2011, according to fund managers recently surveyed by Bank of America Merrill Lynch.
• There are fewer available workers than available jobs today. However, jobs are least accessible for workers with a high school degree or less, for jobs paying less than $1,250 per month, and in industries such as manufacturing, retail, transportation, and construction.
• Finally,the U.S. is dominating the MSCI World index so far this year. The chart below shows the contribution to the index by country. As of last week, the MSCI World was up 4.8 percent, with the U.S. was responsible for 570bp of that. In other words, if it weren’t for the U.S., the MSCI World would be down 0.9 percent.

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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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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.

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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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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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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.

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