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Monthly Market Insight - August 2018

Monthly Market Insight - August 2018

August 12, 2018
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US Markets

Stock prices moved higher in July, propelled by strong economic reports and robust corporate earnings while ignoring the woes of some high-profile tech names.

The Dow Jones Industrial Average led, picking up 4.71 percent. The Standard & Poor’s 500 Index added 3.6 percent while the NASDAQ Composite rose 2.15 percent.1

The month started out volatile but rallied on positive manufacturing numbers and another good unemployment report.

The Tariff Influence

The market remained somewhat hostage to unfolding tariffs, moving higher on positive developments and then lower on surprise news. Some technology stocks and smaller capitalization companies—which are generally seen as less affected by tariffs—steadily advanced as the month progressed. The Russell 2000 Index, which tracks small-cap stocks, rose 3.3% for the month.

Earnings Watch

The second-quarter earnings season began on an optimistic note, with corporate earnings reports producing plenty of surprises to the upside. But cautious earnings guidance, especially from companies affected by the intensifying tariff action, dampened some enthusiasm.

Surprise Reports

Later in the month, the markets were caught off guard by disappointing reports from Facebook and Twitter in two successive days. The news sparked selling in technology stocks, which had led the market much of the year.

With 53 percent of S&P 500 companies reporting, 83 percent reported positive earnings surprises—the highest rate since Q3 2008, when Factset Research started compiling the information.2

After three days of steep market declines, the markets steadied a bit on the final trading day of the month.

Sector Scorecard

The S&P 500 Index’s gains this month were broadly distributed across all industry sectors, with the exception of Communication Services (-2.81 percent) and Real Estate (-0.89 percent). Strong returns were posted by Consumer Staples (+3.47 percent), Financials (+5.87 percent), Health Care (+5.45 percent), and Industrials (+5.07 percent). Gains were also seen in Consumer Discretionary (+1.33 percent), Energy (+1.74 percent), Utilities (+0.69 percent), Materials (+1.93 percent), and Technology (+1.81 percent).3

What Investors May Be Talking About in August

In the month ahead, attention may shift to the yield curve, which shows the difference between short- and long-term interest rates.

Yield Curve Signals

When the yield curve inverts, investors may be voicing a belief that the economy’s short-term outlook is poor, preferring the lower yields of longer-term bonds to those with shorter maturities. This matters to investors because over the last several decades, each time the yield curve has inverted, a recession has followed.4

Though the yield curve has not yet inverted, yields have flattened in late July to a level not seen since 2007. 5

Different this Time?

The Fed seems to be dismissing the shape of the yield curve as a recession indicator, arguing that factors like modest long-term inflation expectations may reduce the reliability of the yield curve as an indicator of a recession in the current environment.

Private economists are divided about what a flattening (or inverted) yield curve means for current economic expansion. This uncertainty may lead to a growing investor focus on relative bond yields, and perhaps some interim market volatility.

World Markets

Reduced trade tensions and strong company earnings sent global stocks generally higher, with the MSCI-EAFE Index adding 2.69 percent.6

European markets were broadly positive, with Germany, France, and Switzerland moving higher. The U.K. lagged, however, as the country continued to grapple with the uncertainty of its exit from the EU.7

Stocks in the Pacific Rim markets also advanced, led by Japan and Australia.8

Indicators

Gross Domestic Product

The economy grew 4.1 percent in the second quarter, its strongest quarterly gain in nearly four years. Strength was seen across the board with healthy consumer spending, trade, and business investment numbers.9

Employment

The unemployment rate ticked up by 0.2 percent to 4.0 percent even as non-farm payrolls increased by 213,000 in June, indicating that a healthy economy was bringing more Americans into the job market. Wage growth remained subdued, rising 2.7 percent compared with June of 201710

Retail Sales

Consumer spending rose 0.5 percent in June, while May’s strong 0.8 percent increase was revised higher to 1.3 percent. Compared to last June, retail sales were up 6.6 percent, well ahead of 2.9 percent inflation rate for that period.11

Industrial Production

Industrial production rose 0.8 percent, rebounding strongly from the previous month’s decline.12

Housing

Housing starts plunged in June, falling 12.3 percent. It was the most significant decline since November 2016. 13New home sales sank 5.3 percent, though they remained 6.9 percent higher for the first six months of the year, compared to the same period in 2017.14Sales of previously owned homes declined for the third straight month, falling 0.6 percent in June. The median sales price was $276,900, up by 5.2 percent from a year earlier.15

Consumer Price Index

Inflation rose 0.1 percent in June. While the monthly increase was minimal, the CPI for the twelve months ending in June 2018 came in at 2.9 percent, the highest level since February 2012.16

Durable Goods Orders

After declines in the last two months, new orders for durable goods rose 1.0 percent. Excluding the defense sector, durable goods orders increased 1.5 percent in June17

The Fed

The minutes from the Fed’s June FOMC meeting contained few surprises for the market, confirming intentions that the Fed had already telegraphed: rates will continue to be raised to a level that no longer stimulates growth, but not so high as to slow down the economy.

The Fed also reiterated its concern that an escalation in trade tariffs poses a danger to economic growth.18 Fed Chair Jerome Powell’s testimony on Capitol Hill confirmed this position.

 

  1. The Wall Street Journal, July 31, 2018
  2. FactSet Research Systems, July 2018
  3. FactSet Research Systems, July 2018
  4. BusinessInsider.com, March 21, 2018
  5. CNBC.com, July 18, 2018
  6. MSCI.com, July 31, 2018
  7. MSCI.com, July 31, 2018
  8. MSCI.com, July 31, 2018
  9. The Wall Street Journal, July 27, 2018
  10. The Wall Street Journal, July 6, 2018
  11. The Wall Street Journal, July 16, 2018
  12. The Wall Street Journal, July 7, 2018
  13. The Wall Street Journal, July 18, 2018
  14. The Wall Street Journal, July 25, 2018
  15. The Wall Street Journal, July 25, 2018
  16. The Wall Street Journal, July 12, 2018
  17. The Wall Street Journal, July 26, 2018
  18. The Wall Street Journal, July 5, 2018