Weekly market update
The major averages finished mixed last week as tech stocks lifted the NASDAQ into positive territory, but the S&P and the Dow finished the week in the red. The big winners last week, and for several weeks in a row, have been the small caps which are somewhat insulated from trade wars/disputes—whatever you want to call it. We are still on track for a positive June, but the concerns over trade could weigh heavy if the rhetoric continues.
The FED did raise interest rates as expected and discussed the possibility of two more rate hikes in 2018. That doesn’t seem to bother the markets because the economy has greatly improved and they are trying to “keep up” and not let the economy run too hot. The European Central Bank and the Bank of Japan made no change to their monetary policies, but the ECB did discuss the timing of reducing the monetary stimulus program they have been using. The problem here is their economic growth has taken a downturn, which is causing fears that they are taking their foot off the gas at the wrong time.
The biggest concern for the markets right now is these tit for tat tariffs between the U.S. and China, and although they have had little impact on the markets, the concern is for them to take away from the strength of the earnings growth we have been experiencing and reduce the positive effects of the tax law changes.
On the economic front, the highlight of the week was on inflation and retail sales. The Consumer Price Index (CPI) is running at 2.8% YoY which is the hottest we have seen inflationary data since 2012, boosted by surging gas prices and housing costs. The Producer Price Index (PPI) is running even hotter with a MoM increase of 0.5%, which is the highest rate since 2011. Still, with CPI running hot and the PPI running even hotter, we still haven’t seen wage growth and that is a concern, even to the FED.
The FED said last week that household spending has picked up and indeed it has. Retail sales jumped 0.8% in May which easily tops estimates. And the results include an upward revision to April which now stands at a 0.4% gain. Further, the FED said that economic activity was accelerating at a strong pace, but here is the catch—the yield curve continues to flatten. The spread between the 2-year U.S. Treasury and the 10-year U.S. Treasury has narrowed to 39 basis points, and the spread between the 10s and the 30s is a mere 12 basis points—not good!
This week we will see how the markets react to further trade disputes, but the early read is that global stocks and U.S. stocks are a sea of red this morning amid those concerns over escalating tariffs between the U.S. and China. Throw in the growing risks of Germany’s Angela Merkel’s government on the brink of collapse over its immigration policy and the mood has taken a turn towards risk off.
Rising mortgage rates, gas prices rising and the trade wars adding to new tariffs—all hitting hard-working Americans into the summer, so we will be we watching how the markets digest these latest concerns.
So, stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
June 18, 2018
