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Week in Review

Week Ending: Friday, August 31, 2018

Recap & Commentary

Markets moved higher in a week that was dominated by trade headlines. After taking seven months to establish a new record high at the end of the prior week, the S&P 500 opened the week with three consecutive new all-time highs. August marked the fifth straight month of gains for both the S&P 500 and NASDAQ.

The U.S. and Mexico announced a preliminary revamp of NAFTA. While described by many analysts as being largely the same as the original agreement, the new version changed various aspects related to auto manufacturing including the amount of a vehicle that must be produced in North America as well as the amount produced in areas paying at least $16/hour. The agreement also made changes to dispute settlement, labor conditions, and agriculture. Talks to include Canada remained ongoing but turned tense at the end of the week after reports emerged that the U.S. wasn’t inclined to negotiate with Canada on various aspects of the agreement.

On Thursday, President Trump indicated his desire to move forward with tariffs on an additional $200B of Chinese goods, as soon as a public comment period ends on September 6. Unlike the first two rounds of tariffs, the new one would mostly include consumer goods. It is widely expected that any new tariffs on Chinses goods will be met with reciprocal measures.

With effectively all S&P 500 companies having reported, second-quarter earnings ended with 80% of companies beating their earnings estimate while 72% beat their sales estimate. For the quarter, earnings growth was 25%, the highest level since 3Q10.

Economic Bullet Points

GDP—Q2 GDP growth was revised upward in its second estimate to an annualized rate of 4.2%, from an already impressive 4.1% initial print. Driving the increase were better than first reported pre-tax corporate profits, which hit a record high $2.2 trillion, and stronger-than-expected business capital spending. Consumer spending, however, which accounts for ~70% of GDP, was revised downward to 3.8% from 4.0%.  Importantly, the slight downward revision to consumer spending hasn’t reduced the market’s conviction that it will continue to support growth through the second half of the year.

Corporate Profits—Pre-tax profits grew $72.4 billion quarter-over-quarter to a record high $2.2 trillion. However, after-tax profits rose only $47.3 billion, compared to the near $150 billion increase in the first quarter. Profits in the near-term will likely remain robust but are expected to continue to decelerate as stimulus from the 2017 Tax Cuts and Jobs Act is absorbed by the market.

Consumer Confidence—The strong labor market and generally optimistic expectations for the future lifted the measure 5.5 points, the strongest result since 2000.

International Trade in Goods—The goods deficit in the July trade reports totaled a much deeper than expected $72.2 billion versus a $66.7 billion monthly average in the second quarter.

Jobless Claims remain very stable, low, and consistent with a low unemployment rate and strong job growth.

Of Note

According to a report by S&P Global, U.S. student debt now exceeds $1.5T.  Since the 2010-11 academic year, debt has grown by $500B.

Market Indices Week of 8/31

S&P 500                          0.9%

Russell 2000                  0.9%

MSCI EAFE                     0.3%

MSCI EM                         0.6%

Commodities                 0.1%

Barclay’s Agg.               -0.1%

US Dollar Index            0.0%

10-Yr Yield                     2.85%

WTI Oil ($/bl)                   $70

Gold ($/oz)                    $1,202

The Week Ahead

  • PMI Manufacturing Index
  • PMI Services Index
  • ISM Manufacturing Index
  • ISM Non-Mfg. Index
  • International Trade
  • Employment Situation
  • Jobless Claims

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