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Financial Markets Commentary For the week of August 20, 2018

Key Market Data

08/10/2018 08/17/2018 One Week Change YTD One Year
S&P 500 Index 2,833.28 2,850.13 +0.59% +7.92% +19.56%
MSCI EAFE Index 1,950.80 1,927.78 -1.18% -3.67% +3.35%
Barclays Capital U.S. Aggregate Bond Index 2,024.22 2,023.86 -0.02% -1.10% -0.78%
10-year Treasury Note Rate 2.874% 2.861% -1.3 basis points +45.5 basis points +67.5 basis points

Concern over the economic plight of Turkey weighed on investors last week, but another dose of strong second-quarter earnings – with Walmart leading the way – along with Friday’s announcement of a possible trade summit in November, helped push both the Dow and the S&P 500 into the black. The ongoing Tesla drama, however, dragged that company’s stock down 9 percent on Friday and the NASDAQ finished off 0.3 percent for the week.

The state of Turkey’s economy and the strength of its lira – not to mention possible contagion for other emerging market economies – was top of mind for investors on Monday when the lira yet again fell to an all-time low against the dollar. Turkey’s President Recep Tayyip Erdoğan is not one to cower when browbeaten by President Trump, and he exchanged threat for threat, refusing to release the American pastor whose imprisonment has fueled the showdown. Along the way, he also doubled tariffs on some American products and enjoined his fellow Turks to boycott the iPhone and “protect the honor of the Turkish lira.” At midweek, Turkey’s currency stabilized after Qatar pledged to invest $15 billion and the Turkish central bank said it was ready to step in and provide liquidity in the event of an economic meltdown. On Friday, however, Secretary of the Treasury Steven Mnuchin said the United States was prepared to take additional punitive steps in the wake of last week’s doubled tariff on Turkish steel unless the pastor was freed immediately.

Trade talk, at last; Kudlow weighs in

China and the United States have been matching each other tariff for tariff with no sign from either side of a rapprochement – until last week, that is, when the Department of the Treasury announced a meeting between the two sides in Washington D.C. on August 22 and 23. The meeting, the first such session since May, would involve lower level officials from the two countries, not cabinet members or trade ministers. But on Friday the stock market jumped on the news that one of the goals of the meeting was to plan a November summit between Trump and China’s President Xi Jinping. Meanwhile, Larry Kudlow, the White House’s economic advisor, opined on China last week, saying its economy looked “terrible” and investment was “collapsing.” China is still expected to register gross domestic product (GDP) growth of 6.6 percent in 2018.

Tesla’s travails

As for Tesla, it was a busy week for CEO Elon Musk and his board as they tried to address the controversy stirred up when he tweeted on August 7 that he was thinking of taking his company private. During the past week, he indicated that discussions with Saudi Arabia were behind the tweet, his company was reportedly subpoenaed by the U.S. Securities and Exchange Commission (SEC), and he gave an interview to The New York Times in which he candidly (and tearfully) spoke of his “excruciating” personal problems, leading to the stock’s plunge on Friday. Even so, when asked if he regretted the text, Musk said, “Why would I?”

Questioning the quarterly

With the second-quarter earnings season wrapping up, President Trump tweeted on Friday that after having talked with “top business leaders,” he thought publicly traded companies should move to a “six-month system” that would “allow greater flexibility & save money.” Some companies are in favor of such a step as it helps with longer-range planning, while some shareholders are concerned about a lack of transparency and accountability if companies only report twice a year. Trump asked the SEC to explore the idea.

Retail sales surge

Retail sales were up more than expected in July, rising 0.5 percent from a downwardly revised 0.2 percent in June; sales improved 6.4 percent from a year earlier. Excluding gasoline and automobiles, retail sales advanced 0.6 percent. In other news, industrial output increased 0.1 percent in July, less than expected from an upwardly revised 1 percent in June, but up 4.2 percent from a year earlier. Manufacturing production rose 0.3 percent from June and 2.8 percent from June of last year. Capacity utilization was unchanged from June’s 78.1 percent. The government said that nonfarm productivity came in at an annualized 2.9 percent in the second quarter. The National Association of Home Builders’ index of builder sentiment fell from 68 in July to 67 in August, its lowest level since last September. Any reading above 50 is positive and sentiment was unchanged from a year earlier. Housing starts rebounded 0.9 percent to a seasonally adjusted annual rate of 1,168,000 after tumbling 12.9 percent in June but were still short of the estimate. Starts were down 1.4 percent from June 2017. Applications for building permits were up 1.5 percent in July to 1,311,000 – 4.2 percent higher than a year earlier. The Fed’s gradual raising of rates hasn’t scared off borrowers; in fact, total household debt rose by $82 billion in the second quarter to $13.3 trillion, a new record. Business inventories were up 0.1 percent in June from a downwardly revised 0.3 percent in May. The University of Michigan’s preliminary reading of consumer sentiment fell from 97.9 in July to 95.3 in August – the lowest reading since September – as respondents said they were concerned about rising inflation. The current conditions gauge, which measures Americans’ perceptions of their finances, fell to 107.8, from 114.4 in July, the largest monthly drop since August of 2011. The National Federation of Independent Business’s Small Business Optimism index was 107.9 in July, the second highest reading in survey history. The Conference Board’s Leading Economic Index rose 0.6 percent in July to 110.7. And first-time jobless claims for the week ending Aug. 11 declined 2,000 to 212,000; the four-week moving average rose 1,000 to 215,500.

A look ahead

This week’s updates will include the latest on existing and new home sales, orders for durable goods and the minutes from the Fed’s meeting on July 31 and Aug. 1. The Fed will also host its annual economic policy symposium in Jackson Hole, Wyo., this coming weekend.