Clear Perspective Advisors

201 N. Constitution Drive, Suite 2

Aurora, IL  60506

630.780.1701

www.clearperspectiveadvisors.com

July 2018
Market Update
(all values as of 08.31.2020)

Stock Indices:

Dow Jones 28,430
S&P 500 3,500
Nasdaq 11,775

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.72%
10 Yr Municipal 0.81%
High Yield 5.38%

YTD Market Returns:

Dow Jones -0.38%
S&P 500 8.34%
Nasdaq 31.24%
MSCI-EAFE -6.23%
MSCI-Europe -7.39%
MSCI-Pacific -4.42%
MSCI-Emg Mkt -1.18%
 
US Agg Bond 6.85%
US Corp Bond 6.94%
US Gov’t Bond 8.09%

Commodity Prices:

Gold 1,973
Silver 28.43
Oil (WTI) 42.82

Currencies:

Dollar / Euro 1.19
Dollar / Pound 1.33
Yen / Dollar 105.37
Dollar / Canadian 0.76
 

Macro Overview – July 2018

Trade and tariffs disrupted markets in June as the U.S. Commerce Department announced tariffs on $250 billion worth of Chinese imports. The 25% tariffs will be imposed on 1,300 items encompassing a variety of products including aluminum, iron, gas turbines, snow blowers, milking machines, and dental drills.

A flattening yield curve, characteristic of rising short-term rates along with lingering long-term rates, startled fixed income markets. Higher interest rates reflect expectations of inflationary pressures and robust growth, while lower rates imply less inflation and dismal economic expansion.

As expected by economists and the markets, the Federal Reserve raised its short-term key policy rate, the federal funds rate, by 25 basis points to 1.75% – 2.00%. The gradual rise in rates is seen as a normalization of interest rates as the U.S. economy continues to expand. The Fed is accelerating the rate of tightening with increases slated for 2019 and 2020 now expected to occur in 2018 and 2019.

Reports from various Federal Reserve district banks reveal that a robust economy, growing tariff pressures, rising wage costs, and a tight labor market are contributing to consumer inflation. The Atlanta Federal Reserve’s economic growth model, GDPNow, estimates GDP growth for the second quarter of 2018 at 4.5%, adding to inflationary pressures.

Household wealth reached $100 trillion for the first time ever, as reported by the Fed. The $100 trillion mark is double of where household wealth was at the lows of the financial crisis in 2009.

The Supreme Court ruled in June that public sector unions cannot charge fees to government employees who do not support the union and who do not want to pay. The decision is expected to further weaken the influence of unions, which have been in a decades-long decline.

Emerging market currencies faltered against the U.S. dollar as global trade tensions and rising rates in the U.S. added pressure on emerging economies. China’s stock market and currency are both off since tariff contentions began, with the Shanghai Composite Index off 13.9% for the year and the Chinese currency off 3.5% against the U.S.dollar in June alone.

Volatility in the second quarter didn’t deter equity indices, as the S&P 500 was up 2.9% and the Dow Jones was up 0.7%. The tech heavy Nasdaq advanced 6.3% for the quarter, driven by buyers seeking shelter from the imposed tariffs. A stronger U.S. dollar is starting to weigh on the technology sector as earnings may become affected.

Sources: U.S. Commerce Dept., Federal Reserve, U.S. Treasury,

https://www.supremecourt.gov, Bloomberg, S&P,Dow Jones, Nasdaq

 
S&P 500 Companies Currently Have Over $1.9 Trillion In Cash

Equities Achieve Positive Quarter Despite Volatility – Domestic Equity Markets Update

Energy and technology sector stocks led the markets in the second quarter. All three major indices ended the quarter positively, in light of volatility and trade policy tensions. The S&P 500 was up 2.9% and the Dow Jones was up 0.7%. The tech heavy Nasdaq advanced 6.3% for the quarter. With oil prices climbing, the energy sector was the market’s top performer for the second quarter, marking its single largest quarterly gain since 2011. Technology sector stocks were also up for the quarter as the sector dodged the tariff turmoil during most of the second quarter, but may be adversely affected by a continuing strengthening dollar. US intellectual property and the growing prominence of technology in the global economy is becoming forefront for regulators, as the administration focuses on protecting U.S. intellectual assets. Markets are attempting to decipher what industry and companies may be hindered by the newly imposed tariffs. Some companies plan to absorb a portion of the tariffs while others will pass along the costs in the form of higher prices to customers. Liquidity among S&P 500 companies is distributed unevenly, with the top 25 companies in the index accounting for over 55% of the $1.9 trillion in corporate cash. The bottom 250 companies in the S&P 500 hold essentially no cash.

Sources: S&P, Dow Jones, Nasdaq, Bloomberg

Flattening Yield Curve Startles Markets – Domestic Fixed Income Update

The rapid rise of short-term rates along with lingering long-term rates created unease with markets. A lack of rising long-term rates is indicative of weak long-term economic growth, where inflationary pressures may not be present or expanding. . The continued increase in the 2-year Treasury yield is drawing interest from short-term investors as the 2.52 % yield at the end of June was greater than the 1.84% yield on the S&P 500.

The difference in yield between the 2-year Treasury note and the 10-year Treasury bond narrowed to levels not seen since 2007. Also known as the spread, the difference between the 2-year note and 10-year bond is a barometer of economic sentiment. Should shorter term rates, such as the 2-year note, yield more than longer term rates such as the 10-year bond, then economic growth is expected to be lackluster. Some analysts view this narrow spread as a temporary event until economic growth accelerates driving longer term rates higher.

Sources: U.S. Treasury, S&P, Bloomberg

 

 
1300 Chinese Made Products Will Be Hit By Tariffs

Chinese Products With The Largest Trade Deficits With U.S. – Trade Policy

Electronic devices and computers are the products with the largest trade deficits with the U.S. Over the past few years, American consumers have become accustomed to inexpensive Chinese made products available in every retail and online store across the country.

One of the biggest casualties of the imposed tariffs are auto manufacturers located in the United States. Ironically, there are currently 10 foreign auto manufacturers with plants in the U.S. compared to only two U.S. owned auto manufacturers. These manufacturers all rely on components primarily imported from Asia and China whose controlled costs are critical to the profitability of the companies.

A list of 1300 identified products imported from China are primarily used as components for larger more expensive products. The question is what percentage of these products are comprised of imported components subject to tariffs.  Foreign manufacturers have skirted tariffs and manufacturing rifts over the years by having certain products assembled in the United States, but comprised of imported components. Hence the controversial tag noting “assembled in the USA”, which many consumers and consumer groups have found to be misleading.

Sources: U.S. Department of Commerce

Emerging Markets Struggle – International Update

Rising rates and a stronger U.S. dollar are weighing on emerging markets, which benefited from years of record low U.S. interest rates. Elevated rates in the U.S. make emerging market assets less attractive than U.S. assets and influence investment overseas to migrate back to the U.S. marketplace.
Currencies from emerging countries including Brazil, South Africa, South Korea, Argentina, and China have all seen pullbacks relative to the U.S. dollar. Many believe that a weaker Chinese currency is a strategy to retaliate against the newly imposed U.S. tariffs. Any continuation of a weakening Chinese currency could amplify risks and volatility for emerging markets. Trade tensions have also negatively affected China’s stock market, with the Shanghai Composite index down over 13% year to date. Worrisome for China is the fact that the Chinese currency and stock market have both headed negative for the year, a gauge for other Asian currencies and equity markets.

Sources: U.S. Treasury, Bloomberg, IMF

 
household wealth exceeded $100 trillion for the first time ever

Record U.S. Oil Exports Help Narrow Trade Deficit – Oil Industry Overview

Technology driven drilling and oil exploration has elevated the U.S. to the third largest oil producer in the world, behind Russia and Saudi Arabia. The EIA estimates that U.S. oil, priced as West Texas Intermediate (WTI) in the energy markets, will continue to be less expensive than its international counterpart, Brent through 2019. Since commodities are price based, the demand for less expensive U.S. oil is expected to rise.

The Commerce Department announced that the U.S. exported a record amount of oil and fuel in April, helping to narrow the nation’s trade deficit. U.S. producers exported nearly $20 billion in petroleum products in April to other countries. The U.S. trade deficit shrank for the second consecutive month in April by 2.1%, partly helped by the rising trend in U.S. petroleum exports. Ironically, higher oil prices have become beneficial for the U.S., as oil industry producers and exporters are seeing rising profits and higher wages.

A 40-year ban on U.S. oil exports was lifted in December 2015. For years, oil companies and industry leaders have sought a relaxation of the export restrictions in order to compete in the global oil markets.  WTI is also known as Texas light sweet because of its relatively low density, light characteristics and sweet because of its low sulfur content. Conversely, Brent Crude is a bit heavier and not as sweet. The lighter and sweeter WTI is easier and less expensive to refine and distill into gasoline, diesel, jet fuel, and other fuel products.      Sources: IEA, EIA, Commerce Department

Household Net Worth Exceeds $100 Trillion – Domestic Economy

Every quarter the Federal Reserve releases its flow of funds survey, a report measuring the net worth of households. The report includes a “balance sheet” of assets such as real estate, financial assets, bank accounts, as well as outstanding debt.  The net worth of U.S. households and nonprofit organizations rose in the first quarter of 2018 to $100.7 trillion, making it the highest on record. Rising home prices in addition to an increase in the equity markets has helped propel household net worth.

Real estate makes up the single largest component of household wealth, representing about 30%. Corporate equities (individual stocks) make up another 15% of net worth. The components making up household wealth fluctuate in value and are affected by different factors, including monetary and fiscal policy. All in all, a rise in the overall value of these assets is of benefit to economic well-being.  Some economists that follow consumer behavior believe that increases in wealth could make consumers feel more comfortable spending their money, thus contributing to economic growth. Source: Federal Reserve