Weekly market update
The major averages finished mixed last week—the Dow and S&P 500 had their first weekly loss in 6, but the NASDAQ and Russell 200 finished in positive territory. Despite being in the middle of the dog days of summer, we have had a lot going on the last two weeks.
- The July jobs report headlines were disappointing, but underlying details were more positive. New jobs totaled a less-than-expected 157,000, but the data also showed upward revisions in June and May. A decline in the U-6 unemployment rate from 7.8% to 7.5% as more people entered the workforce. However, we still have more job openings (6.662 million) than workers to fill (6.26 million). In total, we think the data show the economy is continuing to expand at an above-trend pace.
- The Federal Reserve (FED) raised rates earlier this month and signaled 2 more rate hikes this year. At their policy meeting, the FED pointed to economic strength, highlighted higher inflation and cited strong labor market conditions. Unless conditions change, we expect hikes at the September and December meetings.
- Increased productivity levels could extend the economic expansion. U.S. productivity has grown from 0.7% in 2016 to 1.5% today, helping to put downward pressure on inflation while also boosting growth.
- U.S. corporate profits are diverging. Non-U.S. profits from domestic companies are threatened by the strength of the dollar and tariff policies. Domestic profits; however, look to be on a positive track given accelerating economic growth.
- Trade restrictions have not yet had a significant negative impact on U.S. economic growth. This may be partially due to increased fiscal stimulus from tax cuts and additional spending.
All of this is very positive for the U.S, but then there is Turkey. Why is Turkey all of a sudden important? Let’s take a look.
Stocks fell on Friday as geopolitical concerns pushed the Turkish lira to a record low against the dollar and rattled investors. Turkey has found itself “in the midst of a perfect storm” of worsening financial conditions, shaky investor sentiment, inadequate management of the economy and tariff threats from the U.S. President Trump is pressing Turkish leaders to release a minister they have been detaining for the last two years, and Trump announced massive tariffs against Turkey and their currency began to plummet. So—who cares about the Turkish lira? Apparently, investors are concerned with the contagion around the globe. Banks in the U.S., Europe and in other countries have helped the Turkish economy grow at a rapid pace, but it is all fueled by debt. As their currency tumbles and their interest rates soar, they can’t pay that debt back, and that is going to be a big problem for those who have loaned them money. A very big problem—we’ll see how this plays out.
As a side note, we don’t need to upset them too much—we do have U.S. forces in Turkey and we do store nuclear weapons there—so—just saying.
This week, traders and investors will be focused on these ongoing geopolitical concerns as well as the existing concerns with China, Europe, Mexico and Canada—pretty much everybody really. On the earnings calendar, we will hear from a number of retailers and this could be interesting to see how many will cite the strong dollar and geopolitical tensions hurting their numbers.
There isn’t much on the economic docket, but we will get the latest read on retail sales, consumer sentiment, which is still running at all-time highs and housing starts.
But, the biggest issue is going to be the contagion from exposure to Turkey and as the tide goes out, we’ll see who’s been swimming naked…
Have a good week and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
August 13, 2018
