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Financial Markets Commentary For the week of August 27, 2018

Key Market Data

08/17/2018 08/24/2018 One Week Change YTD One Year
S&P 500 Index 2,850.13 2,874.69 +0.86% +8.87% +20.15%
MSCI EAFE Index 1,927.78 1,957.03 +1.52% -2.15% +5.29%
Barclays Capital U.S. Aggregate Bond Index 2,023.86 2,029.13 +0.26% -0.84% -0.58%
10-year Treasury Note Rate 2.861% 2.811% -5.0 basis points +40.5 basis points +61.6 basis points

And the beat goes on.

The good news about the American economy – robust gross domestic product (GDP) growth, low unemployment, better-than-expected corporate earnings – continued to eclipse everything else, including the failure of trade talks with China, the recent turmoil in Turkey and legal dramas involving President Trump’s former associates. The results? The S&P 500 now has the record for the longest bull run in history, and that index, along with the NASDAQ and the Russell 2000, closed the week at a new high. On Wednesday, the S&P 500 actually set the record for the longest bull streak, defined as a rebound from a drop of 20 percent without a subsequent fall of 20 percent, when it clocked its 3,453rd such day since plummeting to 666 on March 9, 2009. That broke the previous mark set between 1990 and 2000. Some stat mavens maintained that the new streak was not legitimate until the index closed at a new high, but that became moot on Friday when the S&P 500 hit 2,874.69. The Dow remains about 800 points shy of the record it set in January.

The Fed in the news

The Federal Reserve was front and center last week with the release of the minutes of the meeting that ended on August 1 and its annual economic symposium in Jackson Hole, Wyoming. The minutes indicated that the Fed remains upbeat about the economy and on track to raise its benchmark rate for the third time this year at its next meeting in late September, noting that as long as the numbers hold up, “it would soon be appropriate to take another step in removing policy accommodation.” In fact, there was an indication that the Fed may soon remove the sentence that has been boilerplate for the last decade: “the stance of economic policy remains accommodative.” Trade issues were identified as “an important source of uncertainty and risk” that could result in “adverse effects on business sentiment, investment spending and employment,” as well as the “purchasing power of U.S. households.” There was also concern about the slowing pace of residential construction and the minutes flagged “the possibility of a significant weakening in the housing sector.” In Wyoming, the Fed’s Chairman Jerome Powell gave a much-anticipated speech in which he said “the economy is strong” and defended the pace at which the Fed was raising its rate. Some fear that the Fed will either raise its rate too quickly and hurt growth or wait too long and let the economy overheat, and Powell said the Fed was “taking seriously both of these risks.” He did not address the recent comments by the president, who earlier last week said of Powell, “I’m not thrilled with his raising of interest rates, no,” and, “I should be given more help by the Fed.” One central banker at the symposium was less than sanguine about the global economy. Agustin Carstens, General Manager of the Bank for International Settlements, warned that the Trump administration’s protectionist approach to trade “will bring not gain, but only pain. Not just for the United States, but for all of us.”

Trade talks with China fizzle; NAFTA negotiations advance

Going into last week, investors were upbeat because China and the U.S. were meeting to discuss trade for the first time since May and there was the possibility of agreement. There was also hope that the groundwork would be laid for a trade summit between Trump and China’s President Xi Jinping later this year. By all accounts, however, no progress was made, and, in fact, the two countries each imposed new 25 percent tariffs on $16 billion of goods last week. In addition, the U.S. is moving toward another $200 billion in tariffs on Chinese goods. Secretary of Commerce Wilbur Ross downplayed the importance of the meetings as “relatively low-level exploratory sessions.” Progress on trade was reportedly being made on another front, however, as the U.S. and Mexico closed in on a deal to reshape NAFTA. On Saturday, Trump tweeted, “A big Trade Agreement with Mexico could be happening soon.”

Greece off life support, Venezuela on the verge of collapse

Though its economy is far from where it was a decade ago, Greece is no longer being bailed out by European creditors, having received some €320 billion along the way. Last week Greece’s Prime Minister Alexis Tsipras said, “This is a day of liberation,” adding, “We will not commit the hubris of ignoring the lessons of the bailout of Greece.” Still, Greece owes its creditors billions, and while the economy is strengthening, the austerity measures that were part of the deal have left over one-third of the population near the poverty level, according to the Organization for Economic Cooperation and Development. Venezuela, meanwhile, continues its descent into economic chaos. President Nicolás Maduro recently announced the release of a new devalued currency (with five fewer zeros) and a higher minimum wage, among other steps, but the country remains hopelessly mired in debt and dysfunction and the International Monetary Fund said that inflation may reach a mind-boggling 1,000,000 percent this year.

A Brexit back-up plan

In a sign of the gridlock that has characterized negotiations, Great Britain released a contingency plan in case the terms of Brexit are not worked out by the time it will officially leave the European Union in March. Dominic Raab, Britain’s representative in the talks, said that not having a deal “is not what we want, it is not what we expect, but we must be ready.”

Musk reverses course; home sales fall

On Friday, Tesla’s CEO Elon Musk said his company would not look to go private, bringing an end to the drama he ignited two weeks earlier with a late-night tweet hinting that such a step was in the offing. In other news, the National Association of Realtors said that sales of previously owned homes were down for the fourth month in a row in July, off 0.7 percent to an annualized rate of 5.34 million, the lowest level in two years. Sales declined 1.5 percent from a year earlier. New home sales dipped 1.7 percent in July to an annualized 627,000 but were up 12.8 percent from July of 2017. And first-time jobless claims for the week ending August 18 fell 2,000 to 210,000; the four-week moving average fell 1,750 to 213,750.

A look ahead

This week’s updates will include the latest on retail and wholesale inventories, the S&P CoreLogic Case-Shiller home price index, consumer confidence, pending home sales and the government’s second estimate for second-quarter GDP, with the first having come in at 4.1 percent.