Stocks down sharply on latest trade escalation. The S&P 500 Index is down about 1.5% this morning after the latest tariff threat from President Trump was followed by reports of China pulling prior commitments to purchase U.S. agriculture goods. China’s central bank also let its currency (the yuan) fall below the key 7 per dollar level that some view as a line in the sand. These moves, which have unsurprisingly drawn the president’s ire, have increased the odds that this situation may get worse before it gets better. We continue to expect progress toward an agreement by year-end, but investors will likely have to endure more market volatility along the way.
Treasury yields approaching 2016 lows. The latest trade news pushed the 10-year Treasury yield to 1.74% overnight, the lowest level since before the 2016 election. Trade war fears, slowing global growth, and low inflation have led bond markets to fully price in another 25 basis point (0.25%) Federal Reserve (Fed) rate cut in September.
August volatility. August has been one of the worst months for the stock market historically. Last week’s 3.1% slide for the S&P 500 certainly fit that pattern. In today’s Weekly Market Commentary and on the LPL Research blog, we’ll summarize August’s lackluster track record and offer our thoughts on what we expect to see in equities this month.
Great week of earnings results. With 78% of S&P 500 companies’ results in, second quarter earnings are tracking down 1% year over year, above June 30 estimates of a 2.7% decline (despite a 1.5 percentage point drag from Boeing). This growth rate is 1.7 percentage points better than last week. Forward earnings estimates have fallen by 1% since June 30, reflecting tariff costs, slower global growth, and a strong U.S. dollar.
A course correction. The Fed completed its U-turn in policy last week, announcing a rate cut for the first time in 10 years. Investors have struggled to understand the Fed’s intentions in this decision, especially since its last experience with rate cuts was during the depths of the financial crisis in 2008. In this week’s Weekly Economic Commentary, we’ll outline what we think looser policy could achieve in this environment, and why Fed intervention was necessary (even though we still think the U.S. economy is on solid footing).
The week ahead. This week, investors will continue to watch trade headlines and a steady flow of earnings reports, as 64 S&P 500 companies are scheduled to report quarterly results. It’s a light week for economic data after a busy end to July. Data on services activity and wholesale price inflation headline the U.S. economic docket, and internationally, investors will be watching second-quarter gross domestic product (GDP) reports from Japan and the U.K.
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