Investment Commentary –July 11th, 2018

Year to Date Market Indices as of Market Close July 11th, 2018

  • Dow 24,807 (0.36%)
  • S&P 2,785   (4.18%)
  • NASDAQ 7,746 (12.18%)
  • Gold $1,251 (-5.18%)
  • OIL $73.24 23.77%)
  • Barclay Bond Aggregate (-1.49%)
  • Fed Funds Rate 2.0% (last increase was 6/13/18)

Stocks drop broadly as new China tariffs rekindle trade-war jitters

U.S. stocks fell on Wednesday, with major indexes set for their first decline of the past five sessions after the Trump administration announced new tariffs on Chinese goods, the latest example of escalating tensions between the U.S. and its major trading partners, which investors fear could explode into a full-on trade war.

What are markets doing?

The Dow Jones Industrial Average DJIA, -0.60% fell 156 points, or 0.6%, to 24,762. The S&P 500 SPX, -0.48% was down 13 points, or 0.5%, to 2,781. The Nasdaq Composite Index COMP, -0.29% shed 0.4% to 7,726, a decline of 0.4%.

The slump comes after a four-day rally in all three indexes, a streak that represents the Dow’s longest in a month.

The day’s downturn were broad based, with 10 of the 11 primary S&P 500 sectors lower on the day. Leading the drop were the materials and the industrial sectors, both of which dropped more than 1%. The two are considered among the most tied to trade issues.

What is driving the markets?

The White House late Tuesday said it would assess 10% tariffs on a further $200 billion in Chinese goods. The move is seen as deepening the rift with Beijing and sending a message to other trading partners that the U.S. is willing to escalate a trade fight. The U.S. last week hit Beijing with levies on $34 billion in goods, and Beijing retaliated with tariffs of the same amount.

A final decision on the products to be hit with the new tariffs is expected after a consultation period in late August.

JP Morgan Thought of the Week: While uncertainty over trade continues to preoccupy markets, the latest business survey results serve as an important reminder that the US economy is in otherwise excellent health. The ISM (Institute for Supply Management) Manufacturing Index is a monthly indicator of current business conditions, where a level above 50 is consistent with economic expansion. Despite respondents for June’s survey expressing concerns over trade developments, the survey posted an impressive reading of 60.2. Historically there has been a strong relationship between the level of the ISM and growth in S&P 500 earnings. As the US economy continues to boom and with business surveys at healthy levels, we expect to see strong earnings growth, which should be supportive of US equities.


Around the Web:

Earnings ahead: Another quarter of solid earnings growth is expected as companies begin reporting second-quarter results this week. Profits for companies in the S&P 500 are expected to grow by almost 22% compared with the same quarter a year earlier, according to the average estimate of analysts surveyed by FactSet.

Bouncing back: After two weekly declines in a row, U.S. stocks returned to positive territory as the NASDAQ and the S&P 500 continued to outperform the Dow. The 30-stock Dow has a relatively high weighting in industrial stocks that have recently been hurt by rising trade tensions.

Trade retaliation: The Trump administration on Friday followed through with its threat to impose tariffs on $34 billion worth of Chinese products, and China responded in kind with tariffs on a similar scale that target U.S. imports. The two sides continued to exchange harsh words, with no immediate signs of de-escalation.


Other Notable Indices           (YTD)

Russell 2000 (small caps)      11.13

EAFE International                -1.46

EAFE Emerging Markets       -3.58

Shiller Annuity Index               7.98

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.