Week in Review
Week Ending: Friday, August 11, 2017
Recap & Commentary
A sharp increase in bellicose rhetoric between the U.S. and North Korea weighed on global equity markets. The S&P 500 suffered its largest weekly decline since March, European shares fell by the most since Trump’s elections, and volatility, as measured by the VIX jumped to its highest level since April. Investors demand for safe haven assets had the effect of pushing the 10-Year Treasury yield below 2.20% while precious metals such as gold and silver notched solid returns.
The events of the week provided a reminder that geopolitical tensions are difficult to predict and can lead to short bouts of volatility in what is otherwise a fairly constructive fundamental environment. As a result, we suggest that investors remain focused on their longer-term strategic allocations and not try to “time” or tactically “play” what are often very short-lived market movements.
Through Friday, 91% of S&P 500 companies had reported second quarter earnings. To date, 73% and 69% have beaten their earnings and sales expectations, respectively. According to FactSet, the S&P 500 earnings growth rate for second quarter is now forecasted to be 10.2% Y/Y, or ~3.5% higher than the 6.8% forecast at the start of earnings season. Earnings growth expectations for the third quarter currently stand at 6.0%.
Economic Bullet Points
Producer and consumer prices remain soft as a lack of inflation continues to present itself as an issue. Consumer prices at the headline level rose just 0.1% M/M, below expectations for a 0.2% gain, leaving the Y/Y rate at 1.7%. Moderating housing costs and softer vehicle sales are exerting downward pressure on inflation. Core inflation was flat, also at 1.7% Y/Y. A lack of inflationary pressure has raised questions with respect to the Fed’s efforts to normalize monetary policy, specifically the timing of its next rate increase. Producer prices told a similar story, both headline and core (ex. food & energy) prices fell -0.1% M/M. Services were the leading detractor in the month, trade services fell -0.5%, reflecting price weakness in certain sectors.
Credit card debt was lower than expected in the month, at $12.4B versus expectations for $16B. The softer-than-expected headline was due to weaker non-revolving credit (tracking vehicle and student loans), where growth is nonetheless substantial. Gains in revolving credit are a positive for short-term consumer spending and have been on the rise this year, despite questions around whether less qualified borrowers are receiving financing, and the impact on overall credit quality.
Small business optimism rose ahead of expectations to its highest level since February, and just short of its 12-year high set in January. The surge was a surprise, surpassing not only consensus expectations, but also the upper-limit of the forecast range. Business owners are feeling better about the economy because consumers are feeling better- strength in consumer demand was a strong positive in this report. One area of frustration for business owners is the ability to find skilled workers. A tight job market could lead to higher wages and greater consumer spending in the future, a positive for small businesses. However, the struggle to find employees with the necessary skills for open positions provides a challenge to their current expansion efforts.
The labor market, as measured by weekly jobless claims, remains near historic lows as employers hold on tightly to their existing employees. Despite a small rise in weekly jobless claims, demand for labor is undoubtedly a bright spot in the economy.
Market Indices Week of 8/11
S&P 500 -1.4%
Russell 2000 -2.7%
MSCI EAFE -1.6%
MSCI EM -2.3%
Barclay’s Agg. 0.2%
US Dollar Index -0.5%
10-Yr Yield 2.19%
Oil ($/bl) $49
Gold ($/oz) $1,286
The Week Ahead
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