Monthly Market Insights | August 2018
Stock prices moved higher in July, propelled by strong economic reports and robust corporate earnings while ignoring the woes of some high-profile tech names.
The Dow Jones Industrial Average led, picking up 4.71 percent. The Standard & Poor’s 500 Index added 3.6 percent while the NASDAQ Composite rose 2.15 percent.1
The month started out volatile, but rallied on positive manufacturing numbers and another good unemployment report.
The Tariff Influence
The market remained somewhat hostage to unfolding tariffs, moving higher on positive developments and then lower on surprise news. Some technology stocks and smaller capitalization companies—which are generally seen as less affected by tariffs—steadily advanced as the month progressed. The Russell 2000 Index, which tracks small-cap stocks, rose 3.3% for the month.
The second-quarter earnings season began on an optimistic note, with corporate earnings reports producing plenty of surprises to the upside. But cautious earnings guidance, especially from companies affected by the intensifying tariff action, dampened some enthusiasm.
Later in the month, the markets were caught off guard by disappointing reports from Facebook and Twitter in two successive days. The news sparked selling in technology stocks, which had led the market much of the year.
With 53 percent of S&P 500 companies reporting, 83 percent reported positive earnings surprises—the highest rate since Q3 2008, when Factset Research started compiling the information.2
After three days of steep market declines, the markets steadied a bit on the final trading day of the month.
The S&P 500 Index’s gains this month were broadly distributed across all industry sectors, with the exception of Communication Services (-2.81 percent) and Real Estate (-0.89 percent). Strong returns were posted by Consumer Staples (+3.47 percent), Financials (+5.87 percent), Health Care (+5.45 percent), and Industrials (+5.07 percent). Gains were also seen in Consumer Discretionary (+1.33 percent), Energy (+1.74 percent), Utilities (+0.69 percent), Materials (+1.93 percent), and Technology (+1.81 percent).3
What Investors May Be Talking About in August
In the month ahead, attention may shift to the yield curve, which shows the difference between short- and long-term interest rates.
Yield Curve Signals
When the yield curve inverts, investors may be voicing a belief that the economy’s short-term outlook is poor, preferring the lower yields of longer-term bonds to those with shorter maturities. This matters to investors because over the last several decades, each time the yield curve has inverted, a recession has followed.4
Though the yield curve has not yet inverted, yields have flattened in late July to a level not seen since 2007. 5
Different this Time?
The Fed seems to be dismissing the shape of the yield curve as a recession indicator, arguing that factors like modest long-term inflation expectations may reduce the reliability of the yield curve as an indicator of a recession in the current environment.
Private economists are divided about what a flattening (or inverted) yield curve means for current economic expansion. This uncertainty may lead to a growing investor focus on relative bond yields, and perhaps some interim market volatility.
Reduced trade tensions and strong company earnings sent global stocks generally higher, with the MSCI-EAFE Index adding 2.69 percent.6
European markets were broadly positive, with Germany, France, and Switzerland moving higher. The U.K. lagged, however, as the country continued to grapple with the uncertainty of its exit from the EU.7
Stocks in the Pacific Rim markets also advanced, led by Japan and Australia.8
Gross Domestic Product
The economy grew 4.1 percent in the second quarter, its strongest quarterly gain in nearly four years. Strength was seen across the board with healthy consumer spending, trade, and business investment numbers.9
The unemployment rate ticked up by 0.2 percent to 4.0 percent even as non-farm payrolls increased by 213,000 in June, indicating that a healthy economy was bringing more Americans into the job market. Wage growth remained subdued, rising 2.7 percent compared with June of 201710
Consumer spending rose 0.5 percent in June, while May’s strong 0.8 percent increase was revised higher to 1.3 percent. Compared to last June, retail sales were up 6.6 percent, well ahead of 2.9 percent inflation rate for that period.11
Industrial production rose 0.8 percent, rebounding strongly from the previous month’s decline.12
Housing starts plunged in June, falling 12.3 percent. It was the most significant decline since November 2016. 13New home sales sank 5.3 percent, though they remained 6.9 percent higher for the first six months of the year, compared to the same period in 2017.14Sales of previously owned homes declined for the third straight month, falling 0.6 percent in June. The median sales price was $276,900, up by 5.2 percent from a year earlier.15
Consumer Price Index
Inflation rose 0.1 percent in June. While the monthly increase was minimal, the CPI for the twelve months ending in June 2018 came in at 2.9 percent, the highest level since February 2012.17
Durable Goods Orders
After declines in the last two months, new orders for durable goods rose 1.0 percent. Excluding the defense sector, durable goods orders increased 1.5 percent in June17
The minutes from the Fed’s June FOMC meeting contained few surprises for the market, confirming intentions that the Fed had already telegraphed: rates will continue to be raised to a level that no longer stimulates growth, but not so high as to slow down the economy.
The Fed also reiterated its concern that an escalation in trade tariffs poses a danger to economic growth.18 Fed Chair Jerome Powell’s testimony on Capitol Hill confirmed this position.
By the Numbers
All About Weather
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
Any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.
The forecasts or forward-looking statements are based on assumptions, may not materialize and are subject to revision without notice.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
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1. The Wall Street Journal, July 31, 2018
2. FactSet Research Systems, July 2018
3. FactSet Research Systems, July 2018
4. BusinessInsider.com, March 21, 2018
5. CNBC.com, July 18, 2018
6. MSCI.com, July 31, 2018
7. MSCI.com, July 31, 2018
8. MSCI.com, July 31, 2018
9. The Wall Street Journal, July 27, 2018
10. The Wall Street Journal, July 6, 2018
11. The Wall Street Journal, July 16, 2018
12. The Wall Street Journal, July 7, 2018
13. The Wall Street Journal, July 18, 2018
14. The Wall Street Journal, July 25, 2018
15. The Wall Street Journal, July 25, 2018
16. The Wall Street Journal, July 12, 2018
17. The Wall Street Journal, July 26, 2018
18. The Wall Street Journal, July 5, 2018
19. World Meteorological Organization, 2018
20. 247WallSt.com, June 20, 2017
21. Census.gov, July 1, 2017
22. Newsweek, June 26, 2018
23. CNN.com, June 15, 2017
24. Houston Chronicle, September 4, 2017
25. NOAA Office for Coastal Management, 2018
26. ABC13.com, May 31, 2018
27. City of Boston, 2018
28. Indeed.com, July 18, 2018
29. GrandviewResearch, 2017
30. Statista.com, 2017
31. Statista.com, 2018