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Market Commentary, August 6, 2018 For the week of August 6, 2018

Key Market Data

07/27/2018 08/03/2018 One Week Change YTD One Year
S&P 500 Index 2,818.82 2,840.35 +0.76% +7.40% +17.12%
MSCI EAFE Index 2,011.48 1,981.84 -1.47% -1.17% +4.65%
Barclays Capital U.S. Aggregate Bond Index 2,012.76 2,015.66 +0.14% -1.50% -1.07%
10-year Treasury Note Rate 2.955% 2.950% -0.5 basis points +54.4 basis points +72.8 basis points

The United States and China continued their trade war skirmishing last week, issuing new threats and counter-threats, but it was more positive earnings news and a solid jobs report for July that grabbed the attention of investors, sending all three major indexes up as the S&P 500 Index notched five straight weeks in the black, its best such streak this year.

A wide range of companies in a variety of sectors posted positive earnings news, but it was Apple that stole the headlines, as an upbeat report sent the company’s market value over the trillion-dollar mark, the first company ever to pass that milestone (Alphabet, Amazon and Microsoft are all now above the $800-billion mark). This came after tech stocks began the week by continuing the downswing that had begun the week before when Facebook and Twitter tumbled on disappointing earnings news. In fact, at one point the New York Stock Exchange’s FANG+ stocks fell into correction territory, down 10 percent from their recent high. By Friday, with 81 percent of S&P 500 companies having reported, earnings were up 24 percent, which, if it holds, would make the second quarter the best three-month stretch since 2010.

The jobs report

The government reported that 157,000 jobs had been created in July while the household unemployment rate fell from 4.0 percent in June to 3.9 percent. The number of jobs created was below the forecast, partly because of the bankruptcy of Toys “R” Us (which accounted for the loss of 32,000 positions), but revisions added 59,000 jobs for May and June. For the first seven months of 2018, an average of 215,000 jobs have been added to the economy compared to 184,000 for that same period in 2017. In addition, hourly earnings rose 2.7 percent from a year earlier, and the unemployment rate for Americans without a high school diploma, who make up 7.2 percent of the workforce, fell to 5.1 percent, the lowest level since the government began tracking the data in 1992; in 2009 it hit 15.6 percent. The percentage of adults with a job was 60.5 percent, the highest since 2009, and the U-6 unemployment rate, including part-time workers who’d prefer a full-time position and people who want a job but aren’t actively looking, fell to 7.5 percent, the lowest total since 2001.

More trade-war salvos

Putting pressure on China to come to the bargaining table, the White House announced that it was going to assess 25 percent tariffs on an additional $200 billion of Chinese goods, up from the original 10 percent floated in June. China’s recent stonewalling of Qualcomm’s acquisition of NXP Semiconductor may have played a role in the decision, as did the recent weakening of the yuan against the dollar, making Chinese exports cheaper on the global market. And it did nothing to allay President Donald Trump’s angst about the trade imbalance when the government reported that the trade gap rose 7.3 percent in June from May to $46.35 billion. U.S. Trade Representative Robert Lighthizer said, “Regrettably, instead of changing its harmful behavior, China has illegally retaliated against American workers, farmers, ranchers and businesses.” China wasted little time in saying it would again retaliate, announcing 25 percent tariffs on $60 billion in U.S. exports, with the statement from China’s Commerce Ministry noting that the “countermeasures” were being taken “to defend the country’s dignity and the interests of the Chinese people, defend free trade and the multilateral system, and defend the common interests of all countries in the world.” As for who would blink when it came to the showdown, Larry Kudlow, Director of the U.S. National Economic Council, said of China, “Look at their stock market. Look at their currency. They’re the ones in trouble, not us.”

Central banks on the move – and not so much

The Federal Reserve met last week and, as expected, left its benchmark rate unchanged. But the Fed was upbeat about the economy – some form of the word “strong” appeared five times in its statement – and is now expected to raise its rate two more times this year; almost certainly when it next meets in September, and quite probably in December. The Fed’s statement noted that “economic activity has been rising at a strong rate,” and that spending had “grown strongly,” but did not address either the impact of the trade war or sluggish wage growth. The Bank of Japan, which some analysts had expected to raise its rate, did not do so, though it slightly modified the floor and ceiling for its 10-year bond. The Bank of England (BOE), however, responding to higher inflation and concern about Brexit, raised its rate one-quarter of a percentage point from 0.5 percent to 0.75 percent, the highest level since 2009. A higher rate would give the BOE some flexibility come March if Brexit does not go as planned, and on Friday the bank’s Governor Mark Carney said the risk that no exit plan would be in place by March was “uncomfortably high.” Central banks in India and the Czech Republic also raised rates.

In other news, consumer spending rose 0.4 percent in June from the month before, and May’s figure was revised up to 0.5 percent from the original 0.2 percent. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 0.1 percent from June and 2.2 percent from a year earlier; core PCE inflation, less food and energy, was up 0.1 percent and 1.9 percent year over year. Personal income advanced 0.4 percent. The Institute for Supply Management’s manufacturing index fell from 60.2 in June to 58.1 in July but remained comfortably in expansion territory; the ISM’s nonmanufacturing index dipped to 55.7 in July from 59.1 in June. Orders for factory goods increased 0.7 percent in June from the month before. Orders for nondefense capital goods, excluding aircraft, improved 0.2 percent, and orders for durable goods were up 0.8 percent after falling 0.3 percent in May. Construction spending was down 1.1 percent in June from May. Pending home sales climbed 0.9 percent in June from May but were off 4 percent from a year earlier. The S&P CoreLogic Case-Shiller home price index rose 6.4 percent in May year over year. The Conference Board’s index of consumer confidence was 127.4 in July after June’s 127.1. And first-time jobless claims for the week ending July 28 were up 1,000 to 218,000; the four-week moving average fell 3,500 to 214,500.

A look ahead

In addition to more second-quarter earnings news, this week will feature updates on consumer credit, earnings, the producer and consumer price indexes, and wholesale inventories.