Monthly Investment Review — July 2018 August 1, 2018
The stock market had a good month in July, as the S&P 500 gained 3.6% while the Nasdaq rose 2.2%. Bond prices declined slightly as yields rose a bit, with the benchmark 10-year Treasury yield reaching 2.96% at the end of July, while the price of oil pulled back from $74 to $69.
The main news developments driving the market during the month were the healthy U.S. economy and strong corporate earnings for the second quarter, although weak data in the earnings reports of some technology stocks caused a selloff in the technology sector at the end of the month. On the international front, concerns about tariffs and trade wars remain a risk factor for the markets.
S&P 500 – daily chart for the first seven months of 2018
U.S. Economy Booming
Recent economic data indicates that the U.S. economy is very healthy. In late July, the government reported a growth rate of 4.1% in the gross domestic product (GDP), the broadest measure of the economy, in the second quarter. This was an impressive report which indicates a notable acceleration in economic growth. While GDP growth in the first quarter was only 2.2%, many economists expect growth for the full year of 2018 to be in the range of 3%, which would be a very solid performance for the year. The reasons for this economic strength include higher consumer confidence leading to more consumer spending, and increased capital spending by the business sector as a result of last year’s tax reform.
Monthly employment reports have shown consistent gains in job creation, with over 3 million new jobs in the last 18 months, and the unemployment rate falling below 4.0%. The jobs report for July will be released on Friday, August 3rd. On a related note, weekly unemployment claims have fallen to very low levels. In mid-July, weekly unemployment claims were only 207,000, the lowest level in decades. This data confirms that jobs are plentiful and the labor market is strong.
International Trade Remains a Wild Card
The dramatic geopolitical news from earlier this year, such as President Trump’s summit meeting with the leader of North Korea, has faded from the headlines to some extent, which has been helpful for the stock market. Yet tensions may be building with Iran, and the problem of tariffs and potential trade wars continues to be an issue.
On July 25th, the President held a successful meeting with European Commission president Jean-Claude Juncker at the White House, which went a long way toward easing trade concerns with Europe. The two leaders announced progress on a trade agreement, with the goal of moving toward zero tariffs on industrial goods and the removal of other trade barriers, while Europe agreed to import more soybeans and liquefied natural gas from the U.S.
On the other hand, trade tensions remain high with China. In early July, the U.S. imposed tariffs on $34 billion of imported goods from China, and in late July the Trump administration has considered placing much more extensive tariffs on Chinese goods, such as 25% tariffs on $200 billion or more of Chinese imports. This may be part of a larger negotiating strategy involving other issues such as China’s theft of American intellectual property. In the meantime, negotiations are being held with Mexico and Canada regarding NAFTA.
In general, all these issues with tariffs and international trade have been causing intermittent selloffs in the stock market this year, because of fears that a trade war could cause higher inflation and a slowdown in the global economy.
However, the final outcome of all these trade negotiations will not necessarily be bearish for the market. If the negotiations result in new trade deals, with a more level playing field and a reduction in tariffs, it is possible that the end result could be a positive for both the economy and the financial markets.
Technology stock selloff
In general, corporate earnings reports for the second quarter have been very strong. The average gain in earnings has been over 20% and the majority of companies have reported results ahead of expectations. However, some leading technology stocks did not participate in this trend, and the result was a dramatic sharp selloff within the technology sector in late July. It began on July 17th when Netflix (NFLX) announced a weak earnings report with a slowdown in subscriber growth. The stock immediately plunged from $400 to roughly $350, a decline of more than 10% in one day.
Then Facebook (FB) plummeted by more than 20% on July 26th, as its earnings report showed a slowdown in some user metrics, leading analysts to believe that its overall growth rate might decelerate in the future. Twitter (TWTR), another well-known social media stock, plunged by roughly 25% in two days in late July as it announced a decline in active users. Similarly, leading semiconductor stock Intel (INTC) dropped by almost 10% in late July on its earnings report, when it signaled that next generation chips would be delayed.
However, other large technology stocks such as Alphabet (GOOGL), Microsoft (MSFT) and Apple (AAPL) had good earnings reports and have held up well with only minor pullbacks. Apple just reported strong earnings and as a result its stock rose to a new high of roughly $200 a share. The company already had a market capitalization of over $900 billion before its earnings report, and it could soon become the first company in history to reach a market capitalization of $1 trillion.
Conclusion
In summary, the stock market advanced in July amid generally good news on the economy. Corporate earnings have been strong, the stock market’s valuation level is not too high, and interest rates have remained low, so the market has more upside potential. Still, risk factors remain, including the possibility that interest rates could move higher, along with various geopolitical issues including growing tensions with Iran. Also, for the next few months the markets may be increasingly influenced by domestic political news, as the approaching November midterm Congressional elections could have an impact on the economic outlook.