Markets, Economy

Weekly Kickstart (07/30/2018-08/03/2018)

7/30/18 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 0.61 percent to 2,818.82. That solid gain left the benchmark index up 5.43 percent year-to-date, and just 1.88 percent below the record close. Encouraging developments in the trade negotiations between the United States and the European Union were a major factor behind last week’s rally, but equities were already drifting higher prior to the positive headlines. One possible reason for this is the growing belief among many institutional investors that even if a trade war becomes unavoidable, the negative economic effects would still be manageable. For example, a big concern has been that tit-for-tat, retaliatory tariffs will put upward pressure on U.S. inflation, an unneeded headwind with the consumer price index (CPI) already rising at the fastest pace in years. Many Wall Street analysts, though, have argued that a trade war’s impact on domestic inflation should be fairly modest since tariffs are predominately aimed at goods rather than services, and goods account for only about a third of U.S. consumer spending.


In fact, Wells Fargo recently estimated that the tariffs already imposed would add only about one-tenth of a percentage point to the overall rate of consumer price inflation in America, and that taking into account the additional tariffs being floated, the change in headline CPI inflation would rise to just 0.5 percentage points. Although unwanted, such increases would likely not be large enough, ceteris paribus, to significantly alter the trajectory of the U.S. economy or the Federal Reserve’s course of monetary policy. The Administration, though, should still try to avoid a full-on trade war since other negative knock-on effects are possible, e.g. companies may put capital expenditure plans on hold in the face of trade uncertainties. Moreover, with negotiations between the U.S. and other countries still far from over, along with recent signs of weakness in the tech sector, it is possible that volatility in the stock market will not be going away any time soon. Regular investors should therefore continue to focus less on the day-to-day fluctuations in equity valuations and more on the long-term goal of amassing a large retirement nest egg. Assistance with that endeavor is available through the consistent use of tax-advantaged savings vehicles, dollar-cost averaging, and regularly consulting with a professional financial advisor. As always, we are here to help with any questions you may have.


To recap a few of the things we learned about the economy last week, the positives included that housing inflation moderated, demand for U.S.-manufactured durable goods rebounded, core capital expenditures firmed, initial jobless claims held near a half-century low, and gross domestic product growth during the second quarter of 2018 rebounded. As for the negatives, mortgage applications slid, new home sales declined, existing home sales fell for the third month in a row, consumer confidence cooled, and gauges of regional manufacturing activity continued to send mixed signals. This week the pace of economic data picks up, with several important reports on housing, consumers, inflation, and employment scheduled to be released, including the potentially market-moving July job report from the Bureau of Labor Statistics (BLS) due out on Friday. Officials at the Federal Reserve will also be meeting this week, although current market pricing implies only a 2.5 percent chance of another interest rate hike in August.


**A more detailed snapshot of the U.S. economy can be found here.**

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Sources: Econoday, Wells Fargo, CME, FRBSL

Post author: Charles Couch