What’s On Tap: Trade Concerns Don’t Derail Stock Market Gains

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  • Tariff Skirmishes, Good Economic News Continue

  • Has the Housing Market Peaked? 

  • Looking Ahead: Fed Meeting, Housing Prices and Durable Goods

Markets returned to record territory this week as continued economic strength overshadowed trade-war concerns. The Dow Jones Industrial Average’s record close—its first since January 26—marked the index’s 205th all-time best since this bull market train left the station nine-and-a-half years ago. The S&P 500 notched its 207th high-water mark yesterday as well.

While gains are good news, it’s too early to let our pre- and post-midterm-election volatility guard down. Even though a path of continued slow-to-moderate growth is in place, the list of real and potential obstacles present possible potholes. These include slowing global growth, escalating trade battles with China, fading of the “sugar high” of the tax windfall (for consumers and corporations), Special Counsel Robert Mueller’s Russia investigation and the unpredictability of Mother Nature, to name a few.

Also, from an investor standpoint, stock market records have been reached with very little day-to-day volatility. While the markets’ moves look larger because the indexes themselves are at higher levels (the Dow, for instance, has risen from around 8700 to almost 27000 since this bull began running), the fact is that, on a percentage basis, daily action has been muted. On average, between 2008 and 2011, for instance, the Dow saw a daily move of 2% or more 42 times per year. Since 2011, the Dow has averaged just five days a year where it moved 2% or more, with none last year and seven so far this year, all of which occurred from February through April. We caution against complacency or a sense that this market calm will persist.

For the year through Thursday, the Dow Jones Industrial Average has returned 9.7%, while the broader S&P 500 has gained 11.2%. The MSCI EAFE index, a measure of developed international stock markets, is down 1.2%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.48% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.8% for the year.

Despite stock market records, or maybe in part because of them, investors have also been focused on the bond market. Better economic data and the prospect of a Federal Reserve hike in short-term interest rates next week once again moved the benchmark 10-year Treasury yield above 3.00%. Less attention was placed on the 5-year Treasury bond, whose yield has marched higher too and now sits at 2.95%, just a whisker away from 3.00%, making short-term bonds a reasonable alternative for investors who want to reduce risk in their bond portfolios without giving up much yield.

Trade Skirmishes, Good Economic News Continue

Amid the good economic news—unemployment near two-decade lows, reasonable household debt, growth at the best pace since 2014—and stock market records—what are some potential trouble spots? Tariffs and trade skirmishes have gained steam, if not traction in the markets yet. The Trump administration has announced plans to impose a 10% tariff on another $200 billion in Chinese goods and will ratchet that up to 25% on January 1, 2019. China said it would retaliate with new tariffs on $60 billion in U.S. exports, which President Trump countered by threatening duties on an additional $276 billion should China follow through with those levies. 

Wall Street’s reaction vacillates on any given day, but this week investors didn’t seem overly concerned about the dispute. Perhaps the recurring headline has become too familiar by now.

Has the Housing Market Peaked?

Another trend we’re watching: The housing market may have reached a plateau of sorts. Sales of previously owned homes were flat in August after four straight months of declines and the pace of sales is 1.5% lower than it was one year ago. As we’ve seen for a while now, low inventory has translated into higher prices, preventing many would-be buyers from making deals. Still, there are hopeful signs on the horizon. The supply of existing homes for sale rose 2.7% last month from August 2017, the first year-over-year inventory growth in three years.

More inventory is the key to putting first-time homebuyers into homes. With mortgage rates on the rise, the demand is there, but homeowners remain reluctant to sell and builders are constrained by the tight labor markets. As a critical component of our consumer-driven economy, the housing market always merits close attention—after all, a house is the biggest purchase the majority of us will ever make. We’ll keep you posted on whether the market has truly peaked or simply leveled off before another climb higher. 

Looking Ahead: Fed Meeting, Housing Prices and Durable Goods

Next week, the two-day Federal Reserve meeting kicks off Tuesday and culminates in a press conference Wednesday. It’ll be big news, even if everything happens as expected (fed-fund futures are pegging a 94% chance of a 0.25% interest rate hike). We view the likely increase as a clear vote of confidence in the current state of the economy.  

We’ll also get reads on housing prices and new home sales, durable goods orders, personal income/spending/savings, consumer confidence, consumer sentiment and revised data on second-quarter economic growth.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, September 21, 2018, prior to the market’s close.

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