Trade concerns continue, despite stronger-than-expected earnings results, to cast a shadow over the equity and bond markets. Last Thursday, President Trump, dissatisfied with trade negotiations, threatened to implement a 10% tariff on September 1st for the remaining $300 billion of Chinese exports not already subject to tariffs. The markets immediately sold off on fears that an expansion of trade tariffs with China would further damage the U.S. economy. Last week, Nasdaq declined 3.92%; S&P 500® Index fell 3.10%; Russell 2000® Index (-2.87%); and Dow Jones Industrial Average
(-2.60%). Demand for U.S. Treasuries spiked, with the yield on the 10-year Note falling as low as 1.84%, the lowest yield since November 2016.
The predictable reaction reinforces the markets’ unease with the unknowns in the escalating trade disputes. If enacted, the latest tariffs would hit consumer goods; the actual pocketbook impact, though, is less clear as changes in currency values (the Chinese Yuan is weakening relative to the dollar), and pressure on manufacturers could limit price increases. So far, many manufacturers have agreed to negotiated discounts to protect market share and jobs. Also, the terms of the September 1st tariffs are not onerous; the intention may be to prod negotiations. The Chinese government, in indicating that it would respond, also added that they will engage in “intensive contact” with U.S. negotiators to establish “good groundwork” for discussions slated to resume on September 1. Meanwhile, the escalating trade dispute between Japan and South Korea has no resolution in sight.
Last Wednesday, as widely expected, the Federal Reserve cut the fed funds rate by 25 basis points. The Fed also announced an early end to quantitative tightening; looking ahead, the proceeds of maturing bonds in the Fed’s $3.8 trillion asset portfolio will be reinvested. Chairman Powell stated, “We’re thinking of this as a mid-cycle adjustment to policy.” He later added, “I said it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that.” The Fed also cut the interest rate on excess bank deposits from 2.35% to 2.10% to spur lending activity.
Earnings season has been much better than feared. Over 75% of companies in the S&P 500® have reported results; of these, 76% exceeded analysts’ modest expectations by more than 6%. Commentaries, not surprisingly, remain cautious on tariff issues yet most companies assess their business outlooks favorably. Consumer spending, which continues to fuel the economy, more than offsets a slowdown in business investments and manufacturing. The July jobs report supports this optimism as the unemployment rate remains at 3.7% and hourly wages increased 3.2% on an annual basis. Lower fuel prices also provide additional discretionary spending power.
This week essentially ends earnings season. Investors, in looking ahead to the traditional slow period for the markets, will now turn to evaluating the potential impact of additional tariffs as well as the potential benefit of additional interest rate cuts. Market momentum will like be determined by headline news, tweets and further Fed commentary.
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