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Week in Review

Week Ending: Friday, July 27, 2018

Recap & Commentary

Markets were generally positive for the week as investors remained focused on second-quarter earnings.  A potential easing of trade tensions and strong second-quarter GDP growth data were incrementally positive.

Through Friday, 53% of S&P 500 companies had reported second-quarter earnings with 83% and 73% beating their earnings and revenue estimates, respectively. According to industry group FactSet, earnings growth is currently tracking at 21%.

On Wednesday, President Trump and European Union (EU) President Jean-Claude Junker took steps to reduce current trade tension by agreeing not to impose any new tariffs while conducting ongoing trade negotiations. There was also discussion about the EU importing more U.S. soybeans (a market hit hard by recent Chinese tariffs) and liquid natural gas (LNG).  The sensitive issue of tariffs on autos did not appear to be directly addressed.  Nonetheless, the meeting was a positive development in the current trade dispute.

Second-quarter GDP growth registered at 4.1% according to the initial estimate released on Friday.  Consumers spending rebounded significantly from the first quarter, rising to a 4.0% rate, and contributed 2.7 points to headline GDP growth.  Signs that the economy could be at risk of overheating were reflected by the GDP price index which rose 3%, the highest level since 2008. While markets are not anticipating the Fed to increase rates at its upcoming meeting this week, markets will undoubtedly be focused on any commentary regarding inflation as further confirmation of price increases in other data sets could lead the Fed to adopt a more hawkish stance with respect to current monetary policy.

 

Economic Bullet Points

  • Housing — New and existing home sales data remained soft in June despite a number of measures indicating that US economic growth is accelerating. While higher mortgage rates, rising home prices, and tax-code changes that diminished decades-old perks that encouraged homeownership have weighed on sales, historically low inventory remains the primary driver of the stagnation seen YTD. A positive in the reports, however, were indications of a slight uptick in housing inventories. The total inventory of existing homes, which make up the bulk of the housing market, rose to 1.95 million—a mark sufficient enough to make this the first time in three years that inventories were up on a year-over-year basis.
  • Durable Goods — June orders at the headline level increased just 1.0%, falling short of the 3.0% consensus expectation, mainly driven by decidedly underwhelming civilian aircraft orders. However, core durable goods orders (which exclude volatile transportation sector data) were up 0.4% in June against a 0.5% expectation. We consider the core number a better measure, and June’s report is an indication that the factory sector remains on track for modest expansion through year-end.
  • Consumer Sentiment continued to cool in July, extending the M/M trend due mainly to growing concerns about the impact of tariffs on the economy.

Of Note

  • Facebook fell nearly 20% following its disappointing second-quarter earnings report. The plunge erased $119B in market cap, making it the single largest drop ever in market cap for a public company. For perspective, the loss in market cap was greater than the market value of 457 of the S&P 500 companies.

Market Indices Week of 7/27

S&P 500                         0.6%

Russell 2000               -2.0%

MSCI EAFE                    1.3%

MSCI EM                        2.1%

Commodities               1.4%

Barclay’s Agg.            -0.2%

US Dollar Index           0.2%

10-Yr Yield                   2.96%

WTI Oil ($/bl)                 $69

Gold ($/oz)                  $1,224

The Week Ahead

  • Consumer Confidence
  • PMI Manufacturing Index
  • PMI Services Index
  • ISM Manufacturing Index
  • ISM Non-Mfg. Index
  • International Trade
  • Jobless Claims

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