Stocks continued higher last week, as the S&P 500 rose by 0.86 percent to 2,874.69. That was a new record close and it left the benchmark index up 7.52 percent year-to-date. Although equities continue to levitate to all-time highs, intraday volatility has picked up in August, and this is not too surprising since many traders sitting on large gains are likely looking for excuses to take profits. With impressive corporate earnings and a strong domestic economy, overseas headlines have instead provided most of the catalysts for recent selloffs. Turkey, for instance, has been in the spotlight a lot this month because of its various fiscal troubles and ongoing disputes with the United States that have severely weakened the country’s currency. Investors’ concerns, though, have less to do with Turkey and more to do with the fear that such economic woes will spread across the rest of the emerging markets (EM). The general consensus is that this sort of global contagion remains unlikely, but even if it does occur, America’s exposure is believed to be rather limited, which could help explain why related selloffs have so far been short-lived.
For example, U.S. exports to developing economies have surged from roughly $250 billion in 2003 to more than $700 billion by the end of last year, according to a new Wells Fargo analysis. That equates to almost half of all U.S. exports but the value of the goods and services leaving our shores is equivalent to only 14 percent of gross domestic product. American exports to developing nations would therefore need to weaken significantly to have any meaningful effect on the domestic economy. The Wells Fargo report also argued that the direct financial impact from an EM crisis should be limited because the exposure of U.S. banks to developing economies represents only 5 percent of their total financial assets. Further, of the $75 trillion worth of financial assets held by American households at the end of 2016 (latest available data), only around $3 trillion were invested in EM stocks and bonds. While all of this suggests that an emerging market crisis should be manageable, it does not guarantee that EM turmoil will be pain-free for the markets. Moreover, there are still a lot of other potential near-term headwinds for equities, such as monetary policy and the midterm elections. Retail investors should therefore continue to focus less on the day-to-day fluctuations in the market and more on the long-term goal of amassing a large retirement nest egg. Assistance 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 mortgage applications rebounded, housing inflation moderated, first-time claims for unemployment benefits slid to an almost half-century low, and core-capital expenditures, a useful gauge of American business investment, jumped. As for the negatives, new home sales declined, existing home sales fell for the 4th month in a row, demand for U.S.-manufactured durable goods cooled, and business activity in the Midwest region of the country expanded at a slower rate. This week the pace of economic data picks up slightly, with a few important reports on housing, manufacturing, consumers, wage growth, and inflation scheduled to be released.
**A more detailed snapshot of the U.S. economy can be found here.**
What To Watch:
- International Trade in Goods 8:30 AM ET
- S&P Corelogic Case-Shiller HPI 9:00 AM ET
- Consumer Confidence 10:00 AM ET
- Richmond Fed Manufacturing Index 10:00 AM ET
- 5-Yr Note Auction 1:00 PM ET
- MBA Mortgage Applications 7:00 AM ET
- GDP 8:30 AM ET
- Corporate Profits 8:30 AM ET
- Pending Home Sales Index 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 2-Yr FRN Note Auction 11:30 AM ET
- 7-Yr Note Auction 1:00 PM ET
Sources: Econoday, Bloomberg, Wells Fargo, FRBSL
Post author: Charles Couch