Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
The benchmark indexes listed here closed flat to lower last week amid fears that trade penalties will hurt domestic companies’ exports. Only the Russell 2000 closed the week ahead of its prior week’s value. The Dow was hit particularly hard as investors fled stocks of companies that could suffer due to the impending trade wars. President Trump may be targeting an additional $200 billion of Chinese imports and European-made automobiles for higher tariffs. A smaller-than-expected increase in production from OPEC sent oil prices up at the end of last week, pushing the price of some energy stocks higher.
The price of crude oil (WTI) surged last week, closing at $69.32 per barrel, up from the prior week’s closing price of $64.38 per barrel. The price of gold (COMEX) fell to $1,271.70 by early Friday evening, down from the prior week’s price of $1,282.00. The national average retail regular gasoline price fell to $2.879 per gallon on June 18, 2018, $0.032 lower than the prior week’s price but $0.561 higher than a year ago.
S&P 500: 2754 (down 0.89% for the week and up 3.04% for the year)
NASDAQ: 7692 (down 0.69% for the week and up 11.44% for the year)
Dow: 24580 (down 2.03% for the week and down 0.56% for the year)
US Treasury 10yr: 2.89% (from 2.92% last week)
Crude Oil (August): $68.08 (from $65.06 last week)
Gold(August): $1,268.90 (from $1,278.50 last week)
USD/Euro: $1.1703 (from $1.1608 last week)
Portfolio Commentary – StrategicPoint of View®
Outlook for the Second Half of 2018
It shouldn’t be surprising that US stock indices were relatively flat the first half of the year. After all, 2017 brought a stellar, unexpected gift in the form of performance returns. As the year turned over, most investors were aware that stocks can only go up for so long before one of two things happen: they correct or they pause and move sideways. Although we had a modest correction in February, most of 2018 has been characterized by stocks trading in a range without a distinct pattern. This choppy movement, called basing, traditionally has a floor below which stocks tend not to fall for very long and a ceiling that stocks tend not to exceed. Basing gives stocks a chance to take a breather and consolidate. But just as the markets can’t go up forever, so too there is an end to the basing period. At that point, if the economy and company earnings have caught up with the inflated valuation of stocks, the rally will likely resume. However, if the data weakens or there is too much uncertainty, the markets quite possibly correct.
For 2018 the floor has been all of the good things that are bolstering our economy and the ceiling represents the worries that keep investors up at night.
So where does this leave us for the second half of the year?
Republicans were smart to create the stimulus at the beginning of the year before the February correction (which was more technical than economic). The tax cuts and increased spending became the initial floor. When businesses continued to report strong earnings and unemployment dropped to the current 3.8% level, the floor strengthened. At the same time, inflation rose only marginally and consumer and business confidence went through the roof. The various independent research organizations that we consult all had the same reading – no recession in 2018. And a number of analysts venture that 2019 will be a recession-free year as well. All of this good news means stocks have been hard pressed to fall too far, even when assaulted by negative headlines.
Sometime during the second half of the year, the basing is likely to end. But before that happens, several uncertainties have to be addressed. Here are three of the major worries that form the ceiling for the second half of the year.
- A Policy Mistake: This one is on Jerome Powell, the new Federal Reserve Chair. Technically, the theory goes, if the Fed raises interest rates faster than long term bond holders believe is sustainable, the yield curve inverts, and the gap between long term and short term interest rates turns negative. This is often a signal of a pending recession. While the Federal Reserve has already increased rates 6 times, economists do not want to see rates rising faster than the economy can withstand. At the latest meeting of the Federal Reserve this month, the Fed signaled that it might be prepared to push through quarterly rate increases without a pause. That caused one strategist to fret that the Fed would “tighten until something breaks.” Clearly Jerome Powell and his cohorts will be watched very closely for any misjudgment that they might make.
- A Trade War: Trade agreements are meant to be revisited periodically, as economies, products, resources and processes change often. However, trade negotiations are usually conducted out of sight and out of mind of most investors. This time the strategy is different. Publically announced tariffs (taxes on foreign goods) have been threatened and enacted by a number of countries without serious negotiations having been completed. The loud posturing and menacing actions on all sides have made the possibility of an all-out trade war real for investors. Outright trade wars increase prices and inflation thereby slowing economic growth. They can disrupt supply chains, spreading the impact to beyond targeted goods. And they can negatively impact business and consumer confidence slowing down spending and investment. To date the bark is worse than the bite, but that is hard for investors to see in the midst of all the moves and countermoves. While we hope the new strategy works, until it does investors are likely to be nervous. And the negotiations, particularly those around NAFTA and China – could take at least until the end of the summer and potentially into the fall.
- A Slowing Global Economy: Last year the global economy roared ahead and the world enjoyed synchronized growth not seen since 2007. Growth in one country spurred growth in other countries. The strong global economy was one of the impetuses for last year’s impressive stock market gains. This year European manufacturing activity has suffered from a soft first quarter, while disruptive political parties are gaining popularity. Emerging market economies have felt the sting of the rising dollar, at the same time China struggles with high debt and over capacity. Even with the data overall being mixed, the optimism of last year has faded. While the business cycle often experiences soft patches, it isn’t until the economy gets back on track that investors often feel they can breathe a sigh of relief.
All of this means that a sustainable rally might be slower in coming this year. Americans, in general, feel good about the economy, judging that it is moving in the right direction. But investors are quicker to focus on the worries, discounting the future into the present. Our best view for the next six months is continued sideways movement with a slightly higher ceiling and a slightly lower floor. The good news is that stocks tend to break out more often to the upside than to the downside after a prolonged period of being range bound. For now we look for this pattern to continue, with the good news prevaling.
Betsey A. Purinton, CFP®
Chief Investment Officer
The last week of June brings with it some notable economic reports, led by the final estimate of the first-quarter gross domestic product. The report on personal income will show whether wage inflation is mirroring consumer price increases.
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this report is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc.
Copyright 2018. Part of this content contributed by Forefield, Inc.