Monthly Investment Review — August 2018 Sept. 4, 2018
August was a good month for the U.S. stock market, with gains of 3.0% for the S&P 500 and 2.2% for the Dow Jones Industrials. The Nasdaq was even stronger with a gain of 5.7%. Bond prices rose a bit as the 10-year Treasury yield pulled back to 2.85%. The dollar was roughly flat and the price of oil held steady near $70 a barrel.
Notably, the S&P 500 hit a new high for the year, finally breaking out above the peak level it had reached in late January 2018. The Dow Jones Industrial Average still remains slightly below its January peak, but the Nasdaq broke out to a new high in June.
S&P 500 – daily chart for the first eight months of 2018
Strong Economy and Earnings
The market advance was driven by good news on the economy and earnings. Economic reports throughout the month showed continued strength, as consumer confidence hit an 18-year high, while the small business optimism index from the National Federation of Independent Business reached 107.9, its highest level since 1983. Second quarter GDP growth was revised up to 4.2% from an initial reading of 4.1%, and the Atlanta Fed projects growth of more than 4% for the third quarter.
The Federal Reserve’s steady approach to monetary policy has also supported stock prices. On August 24th the market moved higher on comments from Federal Reserve chairman Jerome Powell at the Fed’s annual meeting in Jackson Hole, Wyoming. Powell stated that the strong economy means that further gradual interest rate increases are appropriate, but he also said that inflation remains under control near the Fed’s target range of 2% per year. These comments were viewed as dovish, as they suggested that the Fed will not need to raise interest rates for an extended period of time. Another quarter-point interest rate increase is expected at the Fed’s next meeting in late September, and there is a possibility of another rate hike at the December meeting.
Earnings news has also remained strong. Companies such as Cisco (CSCO) and Lowe’s (LOW), along with major retailers such as Walmart (WMT) and Target (TGT), reported better-than-expected earnings results in mid- to late August. These and other stocks with strong earnings reports all moved sharply higher, giving a boost to the overall market in the second half of the month.
Trade Deal with Mexico
Another positive factor for stocks was news of a new trade agreement between the U.S. and Mexico, which sparked a market rally on August 27th. The deal was praised by both sides as a win – win agreement, providing for more trade in industries such as agriculture and textiles, along with changing the rules of content for the auto industry. Under the agreement, 75% of auto components must be made in North America, and a large percentage must be made by auto workers earning at least $16 per hour.
In the meantime trade negotiations with Canada continued into late August, but by the end of the month no deal had yet been reached. It remains to be seen whether Canada will join the U.S. – Mexico trade deal, effectively replacing the old NAFTA agreement, or whether Canada will sign a separate deal with the U.S. At any rate, the successful outcome of the U.S. – Mexico trade talks was a positive development for international trade, and created hope that other issues involving tariffs and trade disputes may be resolved favorably in the months ahead.
International Problems Remain
The good news on the domestic economy and the Mexican trade deal was offset to some extent by growing problems on other fronts. In mid-August stock markets in the U.S. and Europe sold off for several days amid a setback in diplomatic relations with Turkey and a deterioration in that country’s economy, which sparked a sharp selloff in the Turkish lira and the Turkish stock market. The situation also raised worries about emerging markets in general, as other countries such as Argentina may have similar problems with high debt levels and collapsing currencies.
Meanwhile, North Korea has started to become problematic again. In late August Secretary of State Mike Pompeo was planning to travel to North Korea for talks, but President Trump cancelled the trip because that country has not been making enough progress on denuclearization. The President may return to the maximum pressure campaign of tough sanctions that helped bring North Korea to the negotiating table earlier this year.
China appears to be helping North Korea to bypass economic sanctions, and tensions between the U.S. and China are increasing. Trade talks with China resumed in the second half of August, but no deal was reached. At the end of August, U.S. trade negotiators were considering placing 25% tariffs on $200 billion of Chinese goods, and President Trump threatened to pull the U.S. out of the World Trade Organization. Trade negotiations with China are complicated by a number of issues such as China’s theft of U.S. technology and intellectual property.
Conclusion
The investment picture has been fairly bright, with very good news on the domestic economy offset to some extent by worrisome issues on the international front. These issues include rising tensions with North Korea, a potential trade war with China, and possible turmoil in emerging markets such as Turkey and Argentina. So far the U.S. stock market has been very resilient and has maintained its upward momentum despite these concerns.
Domestic political developments may start to have more influence on the market over the next few months, as investors are likely to focus on the upcoming November midterm Congressional elections and their implications for economic policy.