Weekly market update
The stock market was up earlier last week on optimism about U.S.-China trade talks. Those talks failed—stocks went up anyway. The Russell 2000 led last week adding on another 1.94% (13.24% YTD) and the NASDAQ tacked on another 1.67% (15.91% YTD).
Stocks surged higher on Friday setting fresh new highs as investors cheered a week featuring strong corporate earnings and economic data. Investors also digested a speech from Federal Reserve Chairman, Jerome Powell.
Retailers Lowes and Target both surprised to the upside, as did even Macy’s. The strong results from retailers helped put the major indexes on track for good weekly gains as investors also shook off renewed legal worries surrounding President Trump.
And on the FED speech—Powell said he sees “further, gradual” rate hikes moving forward, noting the economy is “strong” and can handle tighter monetary policy, but protracted trade issues could pose a threat to the economy.
Even as a new round of U.S. tariffs on $16 billion worth of Chinese imports kicked in on Thursday, prompting Beijing to retaliate with its own levies on American goods worth the same amount, investors didn’t even flinch.
Here’s a snapshot of how we finished the week:
- S&P 500 set two new all-time highs last week.
- The Russell 2000 set a new all-time high.
- The Wilshire 5000 set a new all-time high.
- The NASDAQ set a new all-time high.
Strong retail earnings are showing a positive inflection in consumer demand— tied to better wage growth, tax cuts and the best disposable income in over six years. Noteworthy: Target saw the best traffic since 2008 and Walmart posted the best U.S. comparable store sells in over 10 years.
We also hit another historical mark last week. On Wednesday, August 22, the current bull market turned 3,453 days old, marking the longest bull market in history. It began March 9, 2009, in the ashes of the Great Financial Crisis. The slow-but-steady economic recovery, coupled with unprecedented aid from the Federal Reserve, catapulted the Dow from around 6,500 to nearly 26,000 today. The S&P 500 has quadrupled from its 2009 low of 666.
The bull market narrowly survived countless panic attacks from crisis-scarred investors along the way. There was the downgrade of America’s credit rating in 2011, the feared collapse of the Euro, China’s alarming economic slowdown and the dramatic crash in oil prices.
Yet each scare failed to derail the steady rise of the economy and corporate profits that have underpinned Wall Street’s record-breaking run. There were close calls, but the S&P 500 never dropped 20%, which is the trigger for a new bear market.
So, what could possibly derail this rally—here are a few thoughts:
The first indicator is an inverted yield curve. This correctly predicted the last seven recessions since 1968. It typically “flashes red” by inverting 12 months before the beginning of a recession. Right now, the yield curve is pretty flat, but not yet inverted.
Second is the year-over-year change of the Leading Economic Index, which predicts future global economic movements. When it contracts, a recession usually follows. Currently, the index is still growing at 5% year over year, so there’s no immediate need for concern.
Last is the tightening of monetary policy. Although the FED is intent on raising rates, policy tightening shouldn’t be expected for at least another year.
Put all three indicators together and they have correctly predicted the last seven recessions with not a single false positive.
So, this week got off to a screaming start on news that the U.S. and Mexico have come to an agreement on a new trade deal, scrapping NAFTA. The Dow soared 259 points (1.01%), the S&P 500 rose 0.77% and the NASDAQ rose 0.91%. As of this writing, stocks are looking to add to those gains.
We won’t get many earnings to drive stocks, but we will get some fresh data points on the economy. We’ll get the first revision to Q2 GDP, income and spending and the personal consumption expenditure (PCE) and this is the FED’s preferred reading on inflation.
We will also be monitoring further developments with regards to trade and politics, so stay tuned and we’ll keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
August 28, 2018
