Arrow Created with Sketch. Market Commentary

Market Commentary, September 24, 2018 For the week of September 24, 2018

Key Market Data

09/14/2018 09/21/2018 One Week Change YTD One Year
S&P 500 Index 2,904.98 2,929.67 +0.85% +11.12% +19.43%
MSCI EAFE Index 1,939.01 1,994.06 +2.84% -0.13% +4.62%
Barclays Capital U.S. Aggregate Bond Index 2,015.54 2,010.28 -0.26% -1.76% -1.39%
10-year Treasury Note Rate 2.997% 3.064% +6.7 basis points +65.8 basis points +78.7 basis points

The trade war between China and the United States took a decided turn for the worse last week, but, for now, investors are seemingly unconcerned about the potential impact on the global economy, having sent both the Dow and S&P 500 to new all-time highs. Meanwhile, in a sign of continuing confidence in America’s economy, bond prices fell and the yield on the 10-year Treasury closed above 3 percent for the first time since May.

Last week began with the White House announcing a new round of tariffs on $200 billion in Chinese exports that will take effect today. The tariffs will begin at 10 percent and rise to 25 percent on January 1, 2019, and they will cover a range of consumer products, though some 300 exports were exempted after public hearings. In announcing the latest round of tariffs, President Trump said that China’s trade policies “plainly constitute a grave threat to the long-term health and prosperity of the United States economy,” and warned that he would impose another $267 billion in tariffs “immediately” if China retaliated, which would effectively cover everything the Chinese ship to the United States (Chinese exports totaled $505 billion in 2017). As was the case with earlier tariffs, however, the Chinese promised retaliation with another $60 billion in tariffs of 5-to-10 percent on U.S. goods, which, added to the $50 billion already in place, will cover almost everything we export to China. China is also reportedly weighing reducing tariffs on goods exported from other countries starting in October to make U.S. products less competitive.

The Chinese government cancelled the meetings that were scheduled in Washington for later this week, including a session with Vice Premier Liu He and Steven Mnuchin, the Secretary of the Treasury. As for next steps, on Saturday a White House spokesman said, “There are no meetings on the books right now.” China is reportedly thinking of waiting until after the midterm elections to recommence negotiations hoping that Trump’s China-bashing, which plays well with his core voters, will moderate. When asked about the impact of the latest tariffs on American consumers, Secretary of Commerce Wilbur Ross said, “Because it’s spread over thousands and thousands of products, nobody’s going to actually notice it at the end of the day.” But others were not as sanguine about the long-term impact, with The Wall Street Journal opining, “The lack of a strategy makes it hard to secure meaningful gains and resolve a trade war that is damaging both economies.”

Brexit negotiations at an “impasse”

There was drama on another trade front as well after the European Union (EU) rejected Prime Minister Theresa May’s latest proposal for a post-Brexit trade relationship when Britain leaves the EU in March. Donald Tusk, the President of the European Council, said May’s deal “will not work,” and Germany’s Chancellor Angela Merkel added, “No one can belong to the single market if they are not part of the single market.” A miffed May declared negotiations at an “impasse,” and chided the EU for not offering a counter-proposal to what she described as the “only serious and credible plan on the table.” One of the main sticking points is how to manage the border between Ireland, which will remain in the EU, and Northern Ireland, which will not (as it’s part of Great Britain). On Friday, the British pound fell against both the euro and the dollar.

U.S. crude closes above $70 a barrel

U.S. crude moved above $70 a barrel last week after the Energy Information Administration said stocks had declined for the fifth week straight. On Thursday, Trump, who has lobbied The Organization of the Petroleum Exporting Countries (OPEC) to keep prices low, tweeted, “The OPEC monopoly must get prices down now!” OPEC and non-OPEC members met in Algiers yesterday and effectively rejected the president’s calls for increased production. Prices are up partly because of the sanctions Trump has imposed on Iran, due to take effect in November but already cutting into that nation’s oil output.

The bill for Hurricane Florence

In the wake of last week’s hurricane, Moody’s estimated that the cost of the clean-up would be from $38-to-$50 billion. As devastating as the hurricane was, that figure is well below the tab for the three major hurricanes of 2017, with Harvey having cost $133.5 billion, Maria $120 billion, and Irma $84.2 billion.

Comcast outbids Fox for Sky; Musk under investigation

The months-long battle between Fox and Comcast for control of Britain’s Sky TV ended over the weekend with Comcast winning a blind, government-mandated auction with a bid of $38.8 billion. Earlier this summer, Comcast lost a bidding war with Disney for the entertainment assets of Fox, which included a minority share in Sky. And the Justice Department is investigating the tweet by Tesla’s CEO Elon Musk back in August that implied that his company was going private and briefly led to a surge in the company’s stock (which has since fallen about 25 percent including a drop of 3.4 percent on Friday). The Securities Exchange Commission is also looking into the tweet.

In other news, U.S. household net worth was up $2.2 trillion in the second quarter to a new record of $106.929 trillion, the eleventh straight quarterly increase. Thanks to higher home prices and rising mortgage rates, existing home sales were unchanged in August from July but fell 1.5 percent from a year earlier to an annualized 5.34 million, according to the National Association of Realtors. Housing starts increased 9.2 percent in August from the month before to 1.282 million, but the increase was mainly due to apartment/multifamily construction which jumped 27.3 percent. Starts were up 9.4 percent from a year earlier. Applications for building permits fell 5.7 percent in August from July to 1,229,000, off 5.5 percent from August of 2017. The Bloomberg Consumer Comfort Index advanced to 60.2 last week, the first time the index has been above 60 since January 2001. The Conference Board’s index of leading indicators rose 0.4 in August from July. And first-time jobless claims fell 3,000 to 201,000, and the four-week moving average declined 2,250 to 205,750, both the lowest levels since 1969.

A look ahead

This week’s releases will include updates on the S&P CoreLogic Case-Shiller home price index, orders for durable goods, pending home sales, personal income, and consumer sentiment. The government will release its third estimate for second-quarter gross domestic product (GDP) growth, forecast to increase from 4.2 percent to 4.3 percent. In addition, the Federal Reserve will meet on Tuesday and Wednesday; it is widely expected that the Fed will raise its benchmark interest rate at the meeting.