August – 2018 Newsletter

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Index – Month/Year to Date


Dow Jones +4.83%/+4.03%
S&P 500 +3.71%/+6.42%
NASDAQ +2.86%/+11.74%
Barclays US Agg. Bond Index +0.02%/-1.59%
10-Yr Treasury yield was 2.86% at the end of June and 2.95% at the end of July
Source: bloomberg.com

Markets

One could argue the stock market had a relatively good month in July, but that’s only because the bar for the year has been set pretty low. After plunging to 24,117 on June 27, the Dow Jones Industrial Average clawed its way back up to a high of 25,527 by July 26 before leveling off again. In the meantime, volatility remained high as Wall Street continued to closely watch the impacts of Donald Trump’s trade policies and the Federal Reserve’s moves around interest rates.

As for the bond market, it too became a bit more active in late July following a long period of relative calm. After spiking to 3.11 percent in mid-May, the yield on the 10-Year Treasury rate had been hovering just below 2.90 percent for over a month. It finally crept close to 3 percent again as July ended and hit it briefly on the first day of August. The activity was seen as a response to a massive move in Japan’s interest rates stemming from concerns over the Bank of Japan’s efforts to continue tightening monetary policy after years of quantitative easing.

The other big economic news for the month was that GDP growth for the second quarter hit 4.1 percent. That, of course, was the growth rate touted by Trump on the campaign trail and about double the first quarter’s GDP. Trump immediately called the growth rate “very sustainable,” although most economists disagree.

While the stock market nudged higher after the GDP report, it certainly didn’t soar—and in the midst of all the volatility since early February, it still hasn’t gotten anywhere near its peak from January 26, when the Dow Jones Industrial Average hit 26,616. This is because the value of Trump’s economic policies has already been factored into the market. Wall Street basically needs the GDP to keep hitting 4 percent or higher in order for growth to catch up with overvalued stock prices.

If that level of growth really isn’t sustainable (as most economists believe) then the only way for the market to make fundamental sense again is for stock values to shrink down to align with corporate earnings. Translation: another major market correction.


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