VIA NOVA UPDATE: Stocks recover on healthy economic reports and trade optimism.

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  • The S&P 500 recovered the loss of the previous week.

  • The FOMC will debate continued economic strength, but muted inflation pressures.

  • Hints of progress on trade, but specifics remain scarce.

  • The Week Ahead: Focus on trade talks, housing, and Philly Fed survey.

The S&P 500 recovered the loss of the previous week.

Healthy economic reports and positive rumors on trade negotiations helped the S&P 500 recover the previous week’s loss and hit a weekly record high.  The index rose 1.21% and is up over 10% year to date.  Energy, industrial and technology stocks led the advance, while financials were the lone declining sector.  Trade negotiations have been the swing factor in the markets for much of 2018.  Accordingly, the better news helped international and emerging market stocks outperform the S&P, while small cap stocks lagged.

The yield on the 10-year Treasury inched higher and closed the week just below 3%, helping push down the Bloomberg Barclays Aggregate Bond Index -0.11%.  The broad bond index is down -1.58% year to date, though it has hovered in positive territory so far in the third quarter.  In other markets, the dollar fell, but oil and gold prices rose as did real estate.

The FOMC will likely debate continued economic strength, but muted inflation pressures.

Economic reports continue to paint a positive picture in the U.S., suggesting that corporate sales and earnings will continue to grow at a healthy pace.  Small business optimism hit a record high last month, and consumer sentiment rose to the second highest level since 2004.  Retail sales fell short of expectations but were up more than 6½% over the past year.  Industrial output also increased in the latest report, and the labor market, as measured by initial jobless claims, continued to tighten.  Moreover, data from the Labor Department showed there are more job openings than available workers, which may further boost wage growth and consumer confidence in the months ahead.

However, despite the strong economic reports, inflation eased a bit in August.  Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) rose less than forecasted, slowing the annual increase.  Historically, inflation pressures increase as the economic expansion places strains on existing capacity and resources.  In the current cycle, however, the relatively tame inflation data has been a surprise to most everyone, including the Federal Reserve, as they prepare for their September 25-26 Federal Open Market Committee (FOMC) meeting.  Will the FOMC feel a need to raise interest rates as much as expected?  The depressing potential of ongoing trade disputes along with relatively low inflation could nudge members in the direction of a more gradual pace of future rate increases than is currently factored into the market.

Hints of progress on trade, but specifics remain scarce.

Positive comments surfaced over the week, suggesting some progress on trade negotiations.  The news was seen as positive for exporters and international companies, which are generally more export internsive than the U.S.  Talks with Canada remained rigorous, and a finalized deal to reduce "technical barriers to trade" with the EU could come as early as November.

The U.S. also reached out to China to resume talks, but the potential benefit was diluted by an end of week White House tweet repeating threats of tariffs on $200 billion in Chinese imports.  Over the weekend, the Chinese press countered, saying China may cancel the upcoming meeting and could respond with non-trade actions.

Via Nova believes all parties are interested in reaching a deal, and that none want an all-out trade war.  The progress with Mexico, Canada and the EU is evidence of that desire.  However, we also believe that progress on trade is historically very slow, and the latest news suggests that talks will continue for a number of months.  The prospect of protracted trade negotiations remains a cloud over an other wise positive outlook.  Any signs that tensions are easing would likely be positive for stocks, as we saw in the latest week.

The Week Ahead: Focus on trade talks, housing, and Philly Fed survey.

While trade talks will likely remain center stage, the markets will also be analyzing the latest updates on home sales and construction.Housing appears to have plateaued thus far in 2018, so the markets will be looking for signs of a shift in momentum.Investors will also be probing the details in the Philly Fed survey for clues to the potential impact of trade frictions.