HIGHLIGHTS:
- Blame it on trade tensions. The S&P 500 fell, but the Nasdaq and small caps hit record highs.
- Economic fundamentals continue to look solid. Stronger international data a welcome change.
- Trade talk continued to roil markets.
- Coming Week: Durable goods orders and personal income highlight the final week of the second quarter and the first half of 2018.
Blame it on trade tensions. The S&P 500 fell, but the Nasdaq and small caps hit record highs.
Escalating trade tensions continued to weigh on the large cap S&P 500 and Dow Jones Industrial (DJIA) indices in the latest week, but solid economic fundamentals helped lift both the Nasdaq and small cap indices to record highs. The S&P 500 lost -0.87%, while the more export-oriented DJIA lost -2.03% reflecting the elevated risks of escalating tariffs on exporters. Industrials and materials stocks were the biggest losers, while energy and utility stocks improved. Small cap stocks inched higher, but international and emerging market stocks fell.
The yield on the 10-year Treasury note fell slightly for the week and remained below the 3% level, after breaking higher in May. Relatively low bond yields continue to keep borrowing costs in check.
Oil prices rebounded after OPEC raised production limits by less than expected at its Vienna meeting, and oil inventories fell more than expected in the latest report. The lower expected supply data helped boost oil prices by over 6% for the week; a negative for drivers heading out for summer vacations but a positive for energy stocks.
In other stock market news, General Electric was replaced by Walgreens in the DJIA due to GE’s significant downsizing, reminding us that strong performance cannot be assumed even from an industrial powerhouse like GE.
Economic fundamentals continue to look solid. Stronger international data a welcome change.
The domestic economic data pointed to a continued expansion, while international data strengthened following recent weakness. Housing starts were stronger than expected, and the index of leading indicators posted yet another gain. The Philadelphia Fed Business Survey came in below expectations but remained in positive territory. The big positive surprise came on the international front, where the Markit Flash Eurozone PMI reversed course and rose to 54.8 in June from 54.1. A reading above 50 denotes expanding economic activity. The Japan manufacturing survey also increased in June, pointing to continued positive global economic momentum despite recent fears.
Trade talk continued to roil markets.
The trade tariff rhetoric continued, and it once again is being extrapolated to a full-blown trade war. Trade threats have become almost a daily occurrence. President Trump asked for a list of potential new tariffs on China adding $200 billion in addition to the current $50 billion due to take effect soon. China, of course, made its own counter-threats. Friday, the President also suggested a 20% tariff on EU car imports. The aim of these threats is to extract lower trade barriers from our trading partners, but the resistance is strong. While the risk has increased, we still believe the most likely scenario is that a trade war will be avoided. We will continue to monitor developments closely.
Coming Week: Trade talks still key. Durable goods orders and personal income highlight the final week of the second quarter and the first half of 2018.
The market will be on the lookout for further announcements related to trade, which have the potential to move the major averages. On the economic front, the durable goods orders report could offer insights on capital spending trends, while the monthly personal income update for May is expected to show healthy income gains and higher spending. It is the end of the second quarter and the first half of 2018, so portfolio adjustments may also play a role in market action.