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Financial Markets Commentary For the week of July 30, 2018

Key Market Data

07/20/2018 07/27/2018 One Week Change YTD One Year
S&P 500 Index 2,801.83 2,818.82 +0.61% +6.55% +16.08%
MSCI EAFE Index 1,985.19 2,011.48 +1.32% +0.28% +7.27%
Barclays Capital U.S. Aggregate Bond Index 2,021.15 2,012.76 -0.42% -1.64% -0.72%
10-year Treasury Note Rate 2.894% 2.955% +6.1 basis points +54.9 basis points +64.4 basis points

Stocks had a mixed week as positive news – a trade war truce and strong (if not unexpected) second-quarter gross domestic product (GDP) growth – was offset by stock market plunges by Facebook and Twitter, which dragged down the S&P 500 and Nasdaq, respectively. For the week, however, the Dow gained 1.6 percent and the S&P still eked out a 0.6 percent advance, while the Nasdaq dipped 1.1 percent.

The brewing trade war has been top of mind for many investors for months, and last week there was progress on two fronts. First, the White House stepped in and said that it was going to allocate $12 billion in emergency funding to help American farmers hurt by retaliatory tariffs on products such as soybeans. Sonny Perdue, secretary of agriculture, said it was a “short-term solution” that would give the White House “time to work on long-term trade deals” in response to what he called “illegal retaliation” by China, the European Union (EU), Canada and Mexico. The government is already spending $21.5 billion this year on farm support programs.

On Wednesday, President Donald Trump met with Jean-Claude Juncker, president of the European Commission (EC), to discuss trade, after which Trump said the two sides were ready to begin a “new phase” in their relationship. Trump and Juncker committed to negotiate tariffs, trade barriers and red tape. Trump also put on hold the threatened 25 percent tariff on European cars and auto parts. Stocks surged after the meeting, but there was no schedule for next steps. In the following days, the two sides disagreed over what had been said. For example, after Trump told Iowans, “We just opened up Europe for you farmers,” EC spokesperson, Mina Andreeva said, “We are not negotiating about agricultural products,” to which U.S. trade representative, Robert Lighthizer responded, “Our view is that we are negotiating about agriculture, period.”

Trade war update: NAFTA, Qualcomm and Disney

There was other news on the trade war front as Mexico’s President-Elect Andrés Manuel López Obrador said he was ready to seek a “common path” in U.S./Mexican relations. In addition, trade ministers from Canada and Mexico announced their commitment to a trade pact with the United States after a meeting in Mexico City, and Lighthizer told a Senate committee that he was optimistic about a new North American Free Trade Agreement (NAFTA) deal. On the down side, Qualcomm gave up its attempt to buy NXP Semiconductors for $44 billion, a deal announced in late 2016 but since held up by Chinese regulators. The Chinese claimed it was strictly an antitrust matter, but Qualcomm saw itself as a victim of the trade war. China is also one of the countries that will have to sign off on Disney’s $71.3 billion acquisition of most of the assets of 21st Century Fox, which was approved by shareholders of the two companies last week.

Facebook and Twitter plummet after Q2 earnings reports

With 53 percent of S&P 500 companies having reported, 83 percent have surprised on the upside according to FactSet, which, if sustained, would be the best showing since the firm began tracking the data in 2008. In addition, the blended growth rate is a whopping 21.3 percent. However, disappointing news from two companies last week, Facebook and Twitter, roiled the market. On Thursday, Facebook’s stock plunged 19 percent or $119.1 billion after its earnings report, the biggest one-day drop in market value in the history of the U.S. stock market. Prior to Thursday, Facebook’s stock was up 23 percent for the year despite having tumbled 17 percent in March after the story broke about its involvement with Cambridge Analytica, Ltd. As The Wall Street Journal noted, the loss on Thursday was larger than the market value of 457 of companies listed on the S&P 500. Then on Friday, Twitter plummeted 20.5 percent after its earnings release, losing about $7 billion in market value.

GDP hits a four-year high

Analysts and investors expected an upbeat report about second-quarter GDP and they got it, as growth came in at 4.1 percent, the best reading since the third quarter of 2014. Growth was keyed by consumer spending, which jumped 4 percent compared to 0.5 percent in the first quarter (when GDP was 2.2 percent), as well as business investment, government spending and export growth, which soared 9.3 percent. President Trump hailed the news, saying, “Once again, we are the economic envy of the entire world,” and added that he expected growth to exceed 3 percent for all of 2018. In fact, appearing on Fox, he said the 4.1 percent was just a “stepping stone” and GDP could be as high as 9 percent if he could cut the trade deficit in half. However, some pointed out that exports were inflated by companies racing to sell their products before tariffs were put in place and those export numbers will likely fall during the current quarter.

The ECB stands pat, again; existing and new home sales decline

The Federal Reserve, Bank of England and Bank of Japan will all meet this week, but as the Fed continues to gradually raise its benchmark rate, the European Central Bank (ECB) is standing pat. On Thursday, the ECB said its rate would likely remain unchanged until mid-2019, though it still planned to phase out its bond-buying by December. In other news, the National Association of Realtors (NAR) said that existing home sales fell 0.6 percent in June from the month before and were down 2.2 percent from a year earlier, but inventories increased for the first time in three years and the median sales price was up 4.5 percent from May to June and 5.2 percent from June of 2017. New home sales dropped 5.3 percent in June to an eight-month low but were up 2.4 percent year over year. Wholesale inventories were unchanged in June from May. The University of Michigan said that consumer sentiment declined to 97.9 in July from 98.2 in June because of concerns about the trade war. And first-time jobless claims for the week ending July 21 rose 9,000 to 217,000; the four-week moving average fell 2,750 to 218,000.

A look ahead

This week will be a busy one for investors as there will be a flurry of economic updates; a meeting of the Fed, which is expected to leave its benchmark rate unchanged until September; and the announcement of the jobless rate for July, forecast to be 3.9 percent after 4 percent in June. The week’s releases will include the latest on pending home sales, personal consumption expenditures, the S&P CoreLogic Case-Shiller Home Price Index, consumer confidence, construction spending, the Institute of Supply Management’s Manufacturing and Non-Manufacturing Indexes, vehicle sales, orders for durable, factory, and capital goods, and the trade balance.