Weekly Market Update (August 06, 2018 - August 10, 2018)

By Craig Fehr August 10, 2018

U.S. large-cap stocks finished lower on the week, their first weekly decline since the end of June. Weighing on stocks were worries of financial and currency turmoil in Turkey as well as continued tariff announcements between the U.S. and China. We continue to believe most of the threats to raise tariffs are negotiation postures and will be resolved over time without a significant slowdown in global growth. But the current increases have hurt some severely. Remember that even if additional higher tariffs are imposed and may be painful, companies and consumers will likely react quickly and adjust to the new environment.

Stocks Nearly Back to Record Highs -- What Now?

At one point last week, the U.S. stock market had climbed to within half a percent of its all-time high set back in late January. In that period, stocks endured a sharp correction – falling 10.2% -- while grinding higher through the summer to get back near their high-water mark. 
Plenty of forces have been at play of late. Political turmoil, global trade spats, and worries over rising interest rates have spurred sell-offs, while healthy economic readings and record corporate profits have led the rallies. With the market having nearly recovered all of its correction losses, it's a good time to put performance in perspective as we look ahead to what may be in store over the balance of the year.

  • The return to new highs…about time? – It's been 133 days since the S&P 500 last reached a record high. Since this expansion began nearly 10 years ago, when stocks endured a correction (a drop of 10% of more), it took an average of 120 days until the market returned to a new high. With less of an octane boost from the Fed and a more mature economic cycle this time around, it's not surprising that the rebound has been more leisurely. Nevertheless, this is a rebound, and with sub-4% unemployment, elevated consumer confidence, healthier business investment, lingering benefits from tax reform, and surging corporate profits, we think the stock market has the necessary support to reach new highs as we advance.  Encouragingly, for the periods mentioned above, after returning to the previous high, the S&P 500 went on to rise by an average of 9.1% over the following 12 months.1
  • The dog days of summer – August is typically a slower month for market activity, with median August trade volume on the stock exchange about 10% lower than average since 2000.  This doesn't mean your portfolio has to take a vacation, however. Looking back to 1926, the stock market rose in August 63% of the time, and the average return in the month of August was a respectable 1.2%.  So far this month, stocks are slightly in positive territory. Interestingly, in years when stocks finished higher for August, the market gained an average of another 2.2% over the remainder of the year. And when the market fell in August, the average return was 5.0% for the rest of the year.2 The bigger takeaway: fundamentals – not the calendar – are likely to guide the markets over time. As the summer winds down, take the opportunity to review your goals and ensure your portfolio is properly positioned and diversified to keep you on track, regardless of what August and the remainder of 2018 brings.
  • The market may lose a bit of cover – The stock market has risen 5% in just the last 30 trading days thanks to a string of encouraging data. The U.S. unemployment rate recently fell to the lowest level since the late-60's and wages are on the rise, supporting the case for an extended economic expansion. But the real headliner of late has been the corporate profit story. The majority of the S&P 500 has announced results in recent weeks, with quarterly earnings rising by an impressive 26%. Particularly encouraging is sales growth, which is up 10% - double the rate from a year ago, signaling robust consumer and business demand stemming from firming economic conditions and rising confidence.3 While we think the economy and earnings will continue to form a positive foundation for the markets this year, with quarterly earnings announcements drawing to a close, investor attention and the market spotlight is likely to swing back toward tariff turmoil and policy uncertainties in the near term. Volatility is likely to return as this happens.

Sources: 1. Bloomberg. 2. Morningstar Direct. Stocks represented by the total return of the S&P 500 Index. 3. Factset Earnings Insight.

Craig Fehr, CFA
Investment Strategist

The Stock & Bond Market

Index Close Week YTD
Dow Jones Industrial Average 25,313 -0.6% 2.4%
S&P 500 Index 2,833 -0.2% 6.0%
NASDAQ 7,839 0.3% 13.6%
MSCI EAFE 1,951 -1.6% -4.9%
10-yr Treasury Yield 2.87% -0.08% 0.47%
Oil ($/bbl) $67.73 -1.1% 12.1%
Bonds $106.23 0.2% -1.3%

Source: Bloomberg, 08/10/18.  Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

The second-quarter earnings season will continue to wind down next week with less than 3% of companies in the S&P 500 reporting results. Important economic reports coming next week include retail sales on Wednesday, housing starts on Thursday, and the leading economic index on Friday.

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after U.S. markets close.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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