Macro Overview – August 2018

Equities rebounded in July and remained resilient to tariff and trade tensions. Markets are realizing that the U.S. has been somewhat insulated thus far from lingering trade disputes. Various analysts and market strategists are expecting trade tensions to ease as ongoing negotiations alleviate some of the uncertainty.

China’s ability to retaliate against U.S. imposed tariffs is proving to be difficult for China since the country imports far less from the U.S. than the U.S. imports from China. To China’s benefit, the country’s currency, the yuan, has fallen steadily since the onslaught of the new tariffs, ironically making Chinese products less expensive and more competitive internationally. Should the yuan continue to depreciate versus the U.S. dollar, the imposed tariffs may then be offset by the weakening yuan, creating even more trade tension between the two countries.

Because of a more developed and diverse financial market, the United States have numerous sectors for investors to shield themselves from trade politics and tariff disputes. International markets remain exposed and vulnerable to the trending tariff impositions and trade issues.

Trade disputes with various countries have also enhanced volatility throughout the international markets. Emerging market countries, such as Russia, are losing financial ground against the U.S. dollar’s rise. The presence of Russian companies within emerging market indices has fallen from 10% in 2007 to 3% this year, as growth prospects and existing debt has become less favorable.

Short-term and long-term rates rose in July as improving economic data drove rates across all maturities higher. The 10-year Treasury yield ended July at 2.96%, extremely close to the yield on the 30-year Treasury at 3.08%.

The U.S. economy grew at a 4.1% annual rate per GDP (Gross Domestic Product) data released by the Commerce Department. The growth rate is the strongest in four years, validating improved business and consumer expansion. Strong consumer spending, increasing business investment, growing exports and additional government expenditures all contributed to an increase in GDP, the value of all goods and services produced across the economy.

A substantial shift with how corporate earnings are achieved occurred this quarter, as expanding earnings are coming primarily from revenue growth rather than from reducing expenses. Economists optimistically view this as an improvement in overall economic expansion due to higher sales and increased demand for products and services nationwide.

Sources: Commerce Dept., U.S. Treasury, Dept. of Labor, Bloomberg

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. Petroleum products exported to other countries include crude oil, liquified gases, and gasoline.

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. Higher oil prices for decades were a net negative for Americans because of higher fuel prices at the pump, but with no export benefit.

Equities Remain Resilient – Domestic Stock Market

Trade concerns affecting equities were overshadowed by rising corporate earnings and improving economic data. U.S. equities ended with gains across all size companies, small to large caps. Small caps have advanced the most year to date, yet large caps outperformed in July.

Optimistically, all sectors posted gains in July, with industrials leading. As a reversal from the second quarter, value stocks outperformed growth stocks in July, signaling a rotation to less growth-orientated companies.

Half of the largest ten U.S. companies ranked by market value are technology companies, representing over $4 trillion in market value. The other top ten companies include financials, banking and energy.

The telecom sector will be renamed the communications services sector, a better representation of the evolvement of the industry and technology driving it. Traditionally known as a steady sector with a few companies, the sector will now include many more companies and with ample growth orientation, accounting for over 10% of the S&P 500 Index.

Rising input costs are starting to impact certain sectors, as import tariffs are adding to various metal and commodity components. It is too soon to tell which companies may be passing along the higher material costs to consumers.

Sources: S&P, Dow Jones, Bloomberg, https://fred.stlouisfed.org/categories/32255 Delinquencies On Credit Cards & Auto Loans Rise – Consumer Credit

A consistent low interest rate environment over the past eight years has made it easy for American consumers to purchase expensive automobiles and to borrow on credit. Consequently, the amount of outstanding auto loans and credit card balances has escalated over the same period. Increasing delinquencies have become a concerning trend as numerous consumers are past due on auto and credit card payments 90 days and more.

Auto loan delinquencies are at the highest levels in nearly 15 years, a result of what is believed to be looser lending standards. Not only that, but consumers are carrying loans for longer terms, with the average new car loan at 69 months. In April of 2013, the average new car loan was for 65 months.

A rising interest rate environment is also posing a challenge for new automobile buyers and consumers taking out credit. Higher rates raise monthly loan payments thus making it that much more challenging for consumers on an already tight budget.

Source: Federal Reserve Bank of New York A 40-year ban on U.S. oil exports was lifted in December 2015 as the House of Representatives and Senate passed a spending bill that included the dismantling of the decades-old rule. In response to the Arab oil embargo, the U.S. imposed regulations in 1975 that restricted the exportation of crude oil. 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, thus making WTI a higher quality oil and more desirable worldwide. 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