Domestic stocks recorded modest losses last week. Energy stocks were strong early in the week as crude oil prices advanced, while health care, utilities, and real estate stocks ended the week with some positive momentum. Consumer discretionary, financial, and tech names lagged. Mid-cap shares were particularly weak and ended the week the furthest off their recent peaks, down roughly 4.3 percent from their record highs earlier this summer.
The markets took a big hit on Tuesday after the holiday weekend. Lots of ideas were floated as to why the markets reacted to circumstances that were not new and had not caused a major reaction previously. Pick from a typical parade of horribles: an increasing likelihood of military conflict between North Korea and the U.S., including the possibility of nuclear showdown; the lack of political consensus on raising the debt ceiling; the economic impact of hurricanes Harvey, Irma, Jose and whatever the next one after that is called. Maybe it was the disappointing jobs report the previous Friday. Perhaps it was summer ending, and everyone back at their desks and lighting up out of a plethora of caution. All or none of those could have been “the” reason, if a reason exists. As ever, I am skeptical of assigning any reason to the random nature of short-term market movement.
Sentiment may also have been dampened by a speech by Minneapolis Federal Reserve Bank President Neel Kashkari, who stated that recent Fed rate hikes have been detrimental to the U.S. economy. Kashkari’s comments appeared to push down long-term U.S. Treasury yields in particular (see below), which weighed on bank stocks. The financial sector also took a hit from insurance stocks, which wavered in anticipation of losses from Hurricane Irma on top of those from Hurricane Harvey.
Stocks regained some strength midweek, thanks in part to news of a deal in Washington to delay debt ceiling and budget fights until December. With deadlines looming at the end of September to fund the government and raise the debt ceiling, President Trump and Democratic congressional leaders agreed Wednesday to surprising three-month extensions for both in legislation attached to emergency funding for Hurricane Harvey relief. President Trump’s new willingness to work with Democrats and cut-out Republicans led to new worries about how he would get along with his ostensible party on tax reform, however. Reports that the conservative House Freedom Caucus had begun drafting its own tax plan seemed to weigh on sentiment on Thursday, along with continued worries about Irma and North Korea.
The yield on the benchmark 10-year U.S. Treasury note decreased sharply on Tuesday, reaching its lowest level since just before the November 2016 elections. The yield decline continued through Thursday morning. Falling longer-term yields and reduced expectations for another rate hike from the Fed in December contributed in turn to a decline in the U.S. dollar, which fell to its lowest level since the start of 2015, as measured against a basket of foreign currencies.
European equities, weighed down by geopolitical concerns, the euro’s strength, and some negative economic news, ended the week mostly lower. Within the pan-European benchmark Stoxx 600 index, the banking sector, most notably insurance stocks, was weak due to Hurricanes Harvey, Irma and the threat of Jose. The euro’s strength put further pressure on European exporters, whose goods become more expensive for overseas buyers as the eurozone currency strengthens.
In Asia, Japanese stocks declined last week and the yen dropped nearly two percent versus the dollar. Chinese stocks were lower too. Despite recent gains in Chinese reserves, a faster-than-expected slowdown and a resumption of capital outflows still pose risks to China’s outlook.