Performance for Week Ending 8/24/18:
The Dow Jones Industrial Average (Dow) gained 0.47%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.03%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.86% and the Nasdaq Composite Index (NASDAQ) tacked on 1.66%. Sector breadth was mixed with 7 of the 11 S&P sector groups finishing the week higher. The Energy sector (+2.64%) was the best performer while the Consumer Staples sector (-1.79%) was the worst.
||Closing Price 8/24/2018
||Percentage Change for Week Ending 8/24/2018
||Year-to-Date Percentage Change Through 8/24/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 8/20/2018 – 8/24/2018
The major market indices finished the week modestly higher with the S&P 500 finishing at a new all-time higher after posting gains in seven of the past eight weeks. Investors shrugged off the political drama out of Washington and the ongoing tariff tit-for-tat with China and instead focused on the supportive fundamental environment.
Fundamentals Intact: The S&P 500 has now delivered two consecutive quarters of 20%-plus earnings growth, the economy grew by 4.1% during the second quarter and according to the Atlanta Fed’s GDP Now model, Q3 GDP is tracking at a 4.6% pace. The markets valuation has contacted since the start of the year, leaving the S&P at a less demanding P/E multiple of 16-times the 2019 consensus earnings forecast. The headline noise surrounding tariffs and political dysfunction in Washington is not likely to go away anytime soon, however as long as the economy and earnings continue to grow, the market is likely to follow suit.
While we are entering a seasonally weak period for the market and the risk of a market pullback has grown, assuming that macro fundamentals remain stable, any sharp drawdowns would be viewed as a tactical opportunity to add equity exposure to portfolios.
With that said, over the intermediate term we do see a growing probability that the US economy could fall into recession during the first half of 2020. Historically, investors tend to discount the arrival of recession by about eight months, on average, suggesting that the market could begin to face some headwinds later next year.
FOMC Meeting Minutes: On Wednesday, the Federal Reserve released the minutes from the August 1 FOMC meeting. The minutes all but confirmed a rate hike at the conclusion of next month’s meeting. According to the minutes, "many participants suggested... it would likely be soon appropriate to take another step in removing policy accommodation." Beyond that, officials anticipated that "further gradual increases" would be required, which suggests continuing support for the recent pace of one 25 basis point hike every quarter. Trade uncertainty was seen as a downside risk, but officials said they were unsure, given the potential dip in output and rise in inflation from tariffs, what the appropriate monetary policy response would be to a major escalation in trade disputes. Officials also discussed the flattening yield curve, with some worrying an inversion would signal a coming recession while others were willing to play down its significance.
Jackson Hole: The most closely watched event last week was Fed Chair Powell’s speech on Friday at the Jackson Hole symposium. Investors tend to pay close attention to this annual meeting as it has been used in the past to communicate policy initiatives. For the most part Powell stuck to the script, suggesting that the Fed will continue to raise interest rates gradually over the next year or so. Overall, the speech did not signal any change in policy, concluding that further rate hikes “will likely be appropriate.” He did, however, emphasize that if the economic outlook changed markedly, the Fed is ready to change direction too, saying he is “confident” the FOMC would do “whatever it takes” should crisis again threaten.
The Week Ahead: Market activity is likely to be quiet in the week ahead reflecting light attendance due to the upcoming holiday weekend. Reports of interest on the data calendar include; the June Case-Shiller home price index, the Conference Board’s August consumer confidence survey, the first revision to second-quarter GDP, July pending home sales, July personal income and spending, and the University of Michigan’s August consumer sentiment survey. The second quarter earnings season will continue to wind down with just 12 members of the S&P 500 scheduled to release results.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
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