Weekly market update
Here we are in the dog days of summer and stocks don’t look like they are taking a vacation—in fact, July is turning out to be the best month since January, but it’s not over. It is actually quite surprising to see investors shrugging off all of the noise we are getting.
I believe escalating trade risks are the main threat to the global economy and financial markets, but fears may be worse than reality. The FED is also in focus as they remain committed to raising rates and inflationary fears continue to grow. Despite all of this, over the last week, the Dow was up 2.32%, the S&P 500 was up 1.55% and the tech-heavy NASDAQ was up 1.79%. Small-cap stocks, as measured by the Russell 2000, took a well-deserved breather last week falling 0.39%.
Year to date, the Dow finally went positive, the S&P 500 is up just shy of 6%, but the NASDAQ and Russell 2000 are leading the charge, up 14% and 10.5% respectively.
The earning season kicked off as we heard from a number of big banks such as JP Morgan, Bank of America, Citi and Wells Fargo. For the most part, earnings were strong, but Wells Fargo is still suffering from all of the shenanigans that have plagued them for several quarters.
On the economic front, June payrolls show we added 213,000—another strong month for jobs growth. The unemployment rate rose slightly to 4%—still very low, but wage growth was/is lower, causing many economists to question what’s going on. You see, we have more jobs out there than workers to fill them and that should cause upward pressure on wages, but we aren’t getting it.
Something else that is causing angst among analysts and economists is inflation. YoY, the producer price index (PPI) came in really hot—in fact, it was the fastest pace of growth in those numbers in seven years. And consumer prices, as measured by the CPI rose 2.9% in the past year, the biggest gain in six and half years and the core CPI was the hottest since 2008. Given the faster pace at which producer prices are already rising, and the imposition of tariffs, the CPI will be printing much higher numbers soon, leaving the Fed’s 2% target in the dust!
As I mentioned earlier, the FED is adding concerns to investors. The minutes from their June meeting showed that most FED officials see intensified risk around trade policy; however, they remain committed to raising rates amid a strong economy—but remember what I said, raising rates, rising inflation and the lack of wage growth is giving rise to talk of STAGFLATION. Not good.
We have also talked about the flattening yield curve. The spread between the 2-year Treasury and the 10-year Treasury has shrunk to a mere 25 basis points. To many analysts and economists, this is a flashing red light that a recession is just around the corner. I don’t know, but given trade concerns, rising rates, low wage growth and the flattest yield curve in 11 years.
Can I get a “DANGER WILL ROBINSON!!”?
There is a lot we will be watching over the coming weeks. Earnings season kicks into high gear this week and they are expected to be good. But—forward guidance could be suspect, given the concerns over trade and interest rates. The FED and inflationary concerns will also be on the radar, so stay tuned and we will keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
July 17, 2018
