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Financial Markets Commentary For the week of September 04, 2018

Key Market Data

08/24/2018 08/31/2018 One Week Change YTD One Year
S&P 500 Index 2,874.69 2,901.52 +0.93% +9.94% +19.65%
MSCI EAFE Index 1,957.03 1,962.05 +0.26% -1.88% +4.94%
Barclays Capital U.S. Aggregate Bond Index 2,029.13 2,026.72 -0.12% -0.96% -1.05%
10-year Treasury Note Rate 2.811% 2.861% +5.0 basis points +45.5 basis points +74.3 basis points

As August drew to a close, investors continued to accentuate the positive, focusing on the strength of the American economy as opposed to the possible impact of trade wars and emerging markets in peril.

As a result, the S&P 500 and the Nasdaq both hit new highs three times last week and, with a major assist from tech stocks, closed out the month up 3.3 percent and 5.9 percent respectively as the Nasdaq broke through the 8,000-point barrier. Though the Dow remains short of its record high posted back in January, the index is hovering around the lofty 26,000-point mark and added 2.6 percent last month.

GDP and earnings

When it comes to the economy, there was more good news last week. The government’s second estimate for second-quarter gross domestic product (GDP) growth came in at 4.2 percent compared to the initial reading of 4.1 percent, which was already the fastest pace since 2014. Growth was spurred by business spending, in turn helped by the tax cuts passed late last year. In fact, corporate profits surged 16.1 percent in the second quarter, the best year-over-year gain since 2012, and taxes paid during the quarter were down 33 percent from a year earlier. The tax cuts also boosted corporate earnings, and with 99 percent of the S&P 500 companies having reported, earnings during the second quarter are up 25 percent, the best showing since 2010 according to FactSet.

NAFTA news

Early last week, stock indexes hit new highs after the White House announced that it had reached an agreement with Mexico to revise the North American Free Trade Agreement (NAFTA), but the other signatory of the 1994 pact, Canada, was on the outside looking in. “They used to call it NAFTA. We’re going to call it the United States-Mexico Trade Agreement,” said President Trump. He set a deadline of Friday for Canada to get on board, and that country’s Foreign Minister, Chrystia Freeland, arrived in Washington on Tuesday to begin negotiations. Though both sides remained upbeat, no deal was reached, with automobiles and subsidies for dairy products as sticking points. On Friday, an extension was granted, largely because there’s concern that Congress won’t approve a new NAFTA deal unless Canada is part of it – more than thirty states count Canada as their main trading partner. But on Saturday, Trump tweeted, “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off.” The White House now has thirty days to present the deal in writing to Congress, after which Congress has sixty days to consider it.

Trade

Still, there were signs of the toll of the trade war last week. Stocks fell late in the week because of a report by Bloomberg News that President Trump was going to move ahead with his $200 billion in new tariffs on China. In addition, the advance report for the trade deficit showed that it rose 6.3 percent in July to $72.2 billion compared to $67.9 billion in June. And the White House also announced its first payment to farmers hurt by what Secretary of Agriculture Sonny Perdue called “unjustified tariffs,” allocating $4.7 billion.

Pay freeze for federal employees

On Thursday, Trump notified Congress that he’s going to use his emergency powers to freeze the pay of two million federal employees next year in an effort to “put our nation on a fiscally sustainable course.” Federal employees are due for a 2.1 percent raise on January 1, 2019. On Friday, after resistance from both parties, Trump said he was going to spend the holiday weekend reviewing the idea.

Argentina and Turkey

Beyond our borders, emerging market economies continued to reel, with Argentina and Turkey sharing center stage last week. After Argentina’s President Mauricio Macri said he’d asked the International Monetary Fund for a $50 billion bailout, the peso fell to a new low against the dollar and the central bank raised its interest rate to 60 percent from 45 percent. And Turkey’s lira fell back to where it had been against the dollar earlier this month after Moody’s downgraded its rating on eighteen Turkish banks and the central bank rolled back some of the steps it had taken to stabilize the economy by putting a ceiling on the amount of money banks could get when in need. But yesterday, after inflation for August came in at 17.9 percent, the highest level in fifteen years, a statement from the central bank said, “We will take necessary actions,” and “monetary stance will be adjusted,” indicating a probable rate hike when it next meets on September 13.

The Fed has a vice chairman, Coke moves into coffee, inflation is on target

The Senate confirmed Richard Clarida to be Vice Chairman of the Federal Reserve, a position that has been vacant since Stanley Fischer resigned late last year. In the largest brand acquisition it has ever made, Coca-Cola is going to spend $5.1 billion to buy Costa, a chain of 3,800 coffee shops in Great Britain and China, among other countries.

The government reported that household spending rose 0.4 percent in July from June and personal income was up 0.3 percent. The Personal Consumption Expenditures Price Index advanced 0.1 percent from the month before and 2.3 percent year over year. The Core PCE price index, the Fed’s preferred yardstick for inflation, increased 0.2 percent for the month and was up 2 percent for the year, which is the Fed’s target. The University of Michigan Consumer Sentiment Index rose from a preliminary 95.3 for August to 96.2, but that was still the lowest reading since January. However, the Conference Board Consumer Confidence Index hit its highest level since 2000 in August, up to 133.4 from 127.9 in July.

The S&P CoreLogic Case-Shiller home price index climbed 6.3 percent in June from a year earlier. The National Association of Realtors said its pending home sales index fell 0.7 percent to 106.2 in July compared to 107.0 in June, the seventh straight month-over-month decline. And first-time jobless claims for the week ending August 25 fell 3,000 to 213,000; the four-week moving average dropped 1,500 to 212,250, the lowest total since 1969.

A look ahead

This week will see updates on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, motor vehicle sales, nonfarm productivity, factory orders, and, on Friday, the jobless rate, forecast to fall from 3.9 percent to 3.8 percent.