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Financial Markets Commentary For the week of September 10, 2018

Key Market Data

08/31/2018 09/07/2018 One Week Change YTD One Year
S&P 500 Index 2,901.52 2,871.68 -1.03% +8.86% +18.76%
MSCI EAFE Index 1,952.05 1,905.44 -2.89% -4.66% +0.97%
Barclays Capital U.S. Aggregate Bond Index 2,026.72 2,017.69 -0.45% -1.40% -1.79%
10-year Treasury Note Rate 2.861% 2.941% +8.0 basis points +53.5 basis points +90.1 basis points

The major indexes were all down last week as good news about manufacturing, jobs and wages was undone by political tumult, and, more importantly for investors, by concern about tech companies coupled with trade-war threats.

In Washington, Republicans and Democrats clashed over a Supreme Court nominee and President Trump fumed about an anonymous and highly critical New York Times editorial purportedly by a senior White House official. But it was the president’s remarks about trade with Canada and China that caught the attention of investors. Having come to terms with Mexico, the administration is still negotiating with Canada to reshape NAFTA with a September 30 deadline looming, but on Friday Trump said that if Canada didn’t come on board soon he would impose tariffs on cars that would be “the ruination of the country.”

As for China, in addition to the $50 billion in tariffs already imposed (and matched by China), the White House is preparing a second round of $200 billion, and Trump said he was looking into yet another $267 billion in tariffs unless China changes its ways, which it has shown no signs of doing. On Air Force One on Friday, he said, “The $200 billion we’re talking about could take place very soon, depending what happens with them.” He then added, “And I hate to say that, but behind that, there’s another $267 billion ready to go in short notice if I want.” The government just concluded six days of public hearings on the $200 billion in proposed tariffs and will now review the testimony and decide which products will be targeted. This came during a week when China’s government said that its trade gap with the United States reached a new high of $31.05 billion in August, partly because the of the yuan’s recent decline against the dollar. And the U.S. government said that the overall trade deficit for the first seven months of this year was $337.9 billion, its highest level for that span in a decade.

Apple on the trade war

On Friday, a letter from Apple to U.S. Trade Representative Robert Lighthizer was made public in which the company warned of the impact of the upcoming $200 billion in tariffs: “Our concern with these tariffs is that the U.S. will be hardest hit, and that will result in lower U.S. growth and competitiveness and higher prices for U.S. consumers.” In response, Trump took to Twitter on Saturday to exhort Apple to move its operations from China to the United States, tweeting, “Start building new plants now. Exciting!”

A long week for tech

Tech companies in general had a long week – the Nasdaq was off 2.5 percent, its worst week since March. It began on Wednesday when executives from Facebook and Twitter were grilled on Capitol Hill about their efforts to thwart political interference. Though Facebook and Twitter were the only two companies whose executives testified, the impact was contagious as the stocks of 59 of the 73 tech companies in the S&P 500 fell on Wednesday. Separately, Attorney General Jeff Sessions said he was going to begin an investigation into the way tech companies “stifle” political opinion. For the week, Facebook shed 7.2 percent and Twitter 13 percent. There was one positive note for tech companies last week when, on Tuesday, Amazon briefly became the second company after Apple to have a market cap of $1 trillion before the stock retreated.

Manufacturing and jobs

The trade and tech dramas unfolded in a week of generally positive news for the American economy. For example, the Institute for Supply Management said its Manufacturing Index hit a fourteen-year high in August, rising to 61.3 percent from July’s 58.1 percent. Even here, however, there was possible evidence of the trade war’s impact as export orders fell to a ten-month low, though they were still at 55.2 percent and any reading above 50 percent indicates expansion. And on Friday, the Labor Department announced that 201,000 jobs were added in August, slightly above expectations, while the household jobless rate remained at 3.9 percent. In addition, wages were up 0.4 percent from July and advanced a solid 2.9 percent from a year earlier.

Ma and Musk

Two high profile figures from the business world were in the news last week for very different reasons. The billionaire Jack Ma, co-founder of the e-commerce giant Alibaba, is expected to announce today that he’s stepping down as executive chairman of that company to focus on philanthropy. And Tesla’s CEO Elon Musk continued to make the wrong kind of headlines. A month after creating a furor by saying that his company was going to go public, he gave a webcast interview in which he was apparently smoking marijuana. Hours later Tesla’s Chief Accounting Officer, who had been on the job for one month, stepped down. Tesla’s stock fell 6.3 percent on Friday and is down 31 percent over the past month.

In other news, the Bank of England’s Governor Mark Carney said he would extend his term “To promote a smooth Brexit and an effective transition at the Bank of England;” his six-year term was to end next June. Productivity was up a seasonally adjusted 2.9 percent in the second quarter, the best showing since the first quarter of 2015, and up 1.3 percent from a year earlier. Construction spending rose 0.1 percent in July from June to an annual rate of $1.32 trillion. The government said that vehicle sales came in at a seasonally adjusted annual rate of 16.6 million in August, down 0.6 percent from July and 0.9 percent from August of 2017. The ISM Non-Manufacturing Index was 58.5 percent in August compared to July’s 55.7 percent. And first-time jobless claims for the week ending September 1 fell 10,000 to 203,000; the four-week moving average was declined 2,750 to 212,250 – both figures were at their lowest level since 1969.

A look ahead

This week’s updates will include the latest on small business optimism, wholesale trade, the producer and consumer price indexes, retail sales, industrial production, business inventories and consumer sentiment. The Federal Reserve will also release its Beige Book economic report. And, for historians, this Saturday, September 15, will mark the tenth anniversary of Lehman Brothers filing for bankruptcy which helped pave the way for the darkest days of the “Great Recession.”