/perspectives/weekly-viewpoint/turkey-and-tariffs-weigh-on-the-broader-market

Turkey and Tariffs Weigh on the Broader Market

The major market indices finished the week mixed as trade and geopolitical tensions offset the strong second quarter earnings season.

August 13, 2018    |    By Mike Schwager

Performance for Week Ending 8/10/18:

The Dow Jones Industrial Average (Dow) fell 0.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.04%, the Standard & Poor’s 500 Index (S&P 500) closed off 0.25% and the Nasdaq Composite Index (NASDAQ) added 0.356%. Sector breadth was negative with 8 of the 11 S&P sector groups finishing the week lower. The Consumer Staples sector (-1.92%) was the worst performer while the Consumer Discretionary sector (+0.79%) was the best.

Index* Closing Price 8/10/2018 Percentage Change for Week Ending 8/10/2018 Year-to-Date Percentage Change Through 8/10/2018
Dow 25313.14 -0.59% +2.40%
Wilshire 5000 29566.10 +0.04% +6.45%
S&P 500 2833.28 -0.25% +5.97%
NASDAQ 7839.11 +0.35% +13.55%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 8/6/2018 – 8/10/2018

The major market indices finished the week mixed as trade and geopolitical tensions offset the strong second quarter earnings season. Adding to the negative sentiment was concern that the currency and political problems in Turkey could spill over into the broader region. The Turkish Lira has plunged against the US Dollar since the start of the month and on Friday the European Central Bank voiced concern over the impact of a weak Lira on European banks. The S&P 500 lost ground for the first time in six weeks.

On the trade front, the tit for tat tariffs between the US and China continued last week. In response to another round of tariffs on Chinese imports, China retaliated by announcing they will impose 25% duties on an additional $16 billion worth of American goods, including petroleum products. The new duties coupled with data from the Energy Information Administration showing U.S. diesel and gasoline stockpiles gained and crude inventories dropped less than forecast, pushed oil prices sharply lower.

Q2 EPS Summary: While the bar was set very high coming into the quarter, the vast majority of companies have reported better than forecast results. Through Friday, 452 members of the S&P 500 have reported results with over 83% surprising to the upside (average surprise has been +5.5%). Aggregate earnings growth is running at a scorching 25.5% pace on a 10% uptick in revenues. When all is said and done, analysts are forecasting that second quarter earnings will advance by nearly 24%, marking the second straight quarter of 20%-plus growth.

Market View: The environment in the months ahead could prove a bit more challenging for equity investors due to lingering trade tensions, unfavorable seasonals, uncertainty over the economic impact of tariffs, and political turmoil leading up to the midterm elections. While the underlying fundamental environment remains supportive and earnings growth is expected to be solid through the remainder of the year, rising interest rates and higher inflation expectations could limit the expansion in the market’s P/E multiple. While a rerating of valuation multiples higher seems limited, the contraction in valuation multiples over the course of the past few months and record levels of corporate buyback activity, should help buffer the downside in equity prices.

With the economy near full employment and monetary policy set to get tighter, the markets overall risk/reward is looking slightly less attractive. As we look out through the remainder of the summer into early fall a choppy sideways trading range seems likely. However, as we begin to get clarity on the trade situation and the outcome to the midterm elections, the focus should return to the fundamental environment, which in turn, could set the stage for better performance towards the latter part of the year. According to Guggenheim Research, markets often find their footing about 30-days ahead of the mid-terms and have generally produced solid gains during the six months period following the election.

Historically bull markets continue until there are growing signs of recession. As a firm, we are not forecasting a recession until early 2020. Investors tend to discount the arrival of recession by about eight months, on average, before it actually begins, suggesting the market still has room to advance but could begin to face some headwinds around mid/late next year.

The Week Ahead: The second quarter earnings season will continue to wind down with just 14 members of the S&P 500 scheduled to release results. Reports of interest on the data calendar include; July import and export prices, July retail sales, the August Empire State manufacturing survey, July industrial production and capacity utilization, June business inventories, July housing starts, the August Philadelphia Federal Reserve’s business outlook survey, and the University of Michigan’s August consumer sentiment survey.

Definitions

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.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.


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