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Week in Review

Week Ending: Friday, September 14, 2018

Recap & Commentary

Market returns were broadly positive supported by strong U.S. economic data including record-high small business confidence and near-record-high consumer sentiment.  Slightly weaker-than-expected inflation data helped tamp down concerns that the Fed could become more assertive with monetary policy than currently expected.

Trade remained in focus with the news that U.S. Treasury Secretary Steven Mnuchin proposed a new round of trade talks with China. However, China responded by saying that it may skip the talks after President Trump indicated he would like to move forward with tariffs on another $200B worth of Chinese goods.

The European Central Bank reaffirmed its plan to end its bond-buying program by year-end. As part of that, the bank announced that it would reduce the pace of its monthly asset purchases from €30B to €15B beginning in October. As the ECB continues to normalize its monetary policy, we could see a potential impact on U.S. rates. Many analysts believe that highly accommodative monetary policy on the part of the ECB and Bank of Japan has placed “technical” pressures on the long-end of the U.S. Treasury curve; pressures that could now begin to subside as banks normalize policy.

The 10-year anniversary of Lehman Brothers’ collapse spurred numerous articles about the investment bank’s demise and what might trigger the next financial crisis.  Many of the ideas were centered around tightening global monetary policy. These include a “bubble” in sovereign debt and high levels of corporate leverage resulting from companies borrowing aggressively to fund share buybacks, dividend increases, and M&A activity. Other possible factors include significantly underfunded public pension liabilities (upwards of $4T by some estimates), mushrooming student debt, rising populism, and an exacerbation of current trade conflicts.

Without truly knowing what the next catalyst will be, we remain committed to carefully examining fundamentals and valuations and the belief that properly diversified portfolios are the best way for investors to mitigate market volatility and achieve their long-term financial goals.

Economic Bullet Points

Inflation data came in below expectations. The Producer Price Index (PPI), edged 0.1% lower at both the headline and core levels in August. Year-on-year, headline and core PPI registered at 2.8% and 2.3%, respectively. The Consumer Price Index (CPI), at the headline and core levels, rose a lower-than-expected 0.2% and 0.1%, respectively, last month. Year-on-year, headline inflation eased to 2.7% from 2.9%, while core inflation moderated to 2.2% from 2.4%.

Consumer Credit grew $16.6B in July, versus a revised $8.5B increase in June, driven by robust growth in non-revolving credit balances (auto/student loans).

Retail Sales rose just 0.1% in August, but significant revisions to prior months’ data suggest that consumer spending remains supportive of 3Q GDP growth.

Industrial Production increased 0.4% as strength in mining and utilities offset softness in manufacturing. Overall, US industrial activity remains solid.

Sentiment—Small business and consumer optimism hovered near all-time highs in August, in line with the year-to-date trend.

Of Note

On an inflation-adjusted basis, median household income in 2017 reached a new record high of $61,372, beating the old record of $60,309 set in 2016.  Prior to 2016, the most recent peak in median income was set in 1999 at $60,062.

Market Indices Week of 9/14

S&P 500                           1.2%

Russell 2000                  0.5%

MSCI EAFE                      1.8%

MSCI EM                         0.5%

Commodities               -0.1%

Barclay’s Agg.               -0.1%

US Dollar Index           -0.5%

10-Yr Yield                     2.99%

WTI Oil ($/bl)                   $69

Gold ($/oz)                   $1,202

The Week Ahead

  • New York Mfg Survey
  • Philly Fed Business Outlook
  • Housing Starts
  • Existing Home Sales
  • Leading Indicators
  • Jobless Claims

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