Weekly market update
Stocks traded higher all week in the face of new tariffs on China proposed by the President. And for the month, the Dow and S&P 500 are higher, but the NASDAQ and Russell 2000 are lower, but only slightly. The standout index; however, was the Dow Transport average, which roared ahead to a new record high. That got the attention of some of the Dow Theory group.
For the quarter, which ends next week, tech stocks and small caps have lagged, but their year to date performance is still well ahead of the Dow or the S&P.
So far through last week, the S&P is on pace for the best quarter since Q4 2015—and only a short distance from best since Q4 2013.
Investors seem to care less about the ongoing saber-rattling surrounding trade and tariffs and they continue to focus on the strength of the economy and the positive macroeconomic data—stronger industrial production, smaller than expected increases in producer prices and consumer prices. Combine that with soaring consumer confidence and small business optimism that is at record levels and things don’t appear too bad here in the U.S.
The U.S. major indices continue to be the safety trade, and while some balk at that thought—just look at what is happening around the world. The U.S. stock market is making new all-time highs, the economy hasn’t been this strong since the Ronald Reagan ignited the greatest bull market the world has ever seen, and with unemployment at historic lows, GDP nearing 4%, interest rates (artificially) low but higher than other developed markets, manufacturing making a resurgence, lower personal and corporate taxes and expectations for another strong quarterly earnings season—investors in the U.S. equity space have been handsomely rewarded.
Then we have the rest of the world. Europe has finally starting to groan under the weight of emerging market turmoil—last week, Bloomberg reported that the European Central Bank (ECB) was set to revise its forecasts lower for euro-area economic growth as global trade tensions dampen external demand, according to officials familiar with the latest projections.
The growing pessimistic outlook comes at an “awkward time” for the ECB, just as it prepares to wind back stimulus, though the adjustments probably aren’t big enough to derail those plans yet unless of course the emerging market turmoil continues and results in even more foreign factory order weakness.
It is not just in Europe where they are having problems. Hong Kong is 16% below where it was in 2007 and has now officially entered a bear market for 2018. It is down just over 20% as of last week. The MSCI Emerging Markets Index is 26% below its 2008 highs. And the worst market of all—Japan—that index is 40% BELOW its 1989 peak—29 years ago.
So, to put it in perspective, the U.S. is alive and well, earnings season begins in three weeks and expectations are for another ‘blowout’ quarter of 20% y/y earnings growth and this contradicts what is happening around the world. Asian and European economies are not keeping up with us and that could prove to be an issue going forward…if we don’t fix trade issues.
Don’t be fooled—caution is still the buzzword—as investors bet on the outcome of trade talk and the news that China has appealed to the World Trade Organization (WTO) to impose sanctions upon us. Any negative headline does have the ability to give investors an excuse to hit the sell button—so stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
September 17, 2018
