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Perspectives from Above the Noise -- Week of August 13th, 2018

Perspectives from Above the Noise -- Week of August 13th, 2018

August 13, 2018
Stocks Slump Amid Turkey Economic Crisis

August 6-10, 2018 Recap

Global Equities Slump. U.S. stocks slumped on Friday, following foreign markets lower after President Trump doubled tariffs on aluminum and steel imports from Turkey to 20% and 50% respectively, widening Turkey’s already dire economic crisis. Friday’s pullback erased weekly gains for the Dow and S&P 500, while the Nasdaq Composite pared weeklong gains.

Weekly Performance. For the week, the S&P 500 declined by 0.18%, ending a five-week rally, the Dow Industrials fell 0.59%, and the tech-heavy Nasdaq Composite gained 0.40%, but snapped an eight-day winning streak.

What Went Wrong for Turkey? Turkey’s economy has reeled recently as its central bank keeps interest rates low even as inflation rate reached 16% last month, well above their central bank's 5% target. Turkey’s lira, which fell as much as 20% last Friday, reached a fresh record low on Monday.

Core Prices Rise. The headline and core consumer price indices (CPI) each rose 0.2% in July, while the annual increase in the core CPI (excludes volatile food & energy prices) was 2.4%, the largest year-over-year (YoY) rise since September 2008. The headline CPI was unchanged at 2.9% YoY. Separate data showed that real weekly wage growth slowed to 0.1% last month, down from a revised 0.5% increase in June.

Consumer Sectors End as Opposites. Eight of the 11 major sectors posted ended negative for the week, with Consumer Staples (-1.87%), Real Estate (-1.80%) and Industrials (-0.92%) down the most. Meanwhile, Consumer Discretionary (+0.81%), Telecom (+0.69%) and Technology (+0.44%) outperformed.

Bond Prices Advance. Treasurys rallied, sending the 10-year yields below 2.9% as July CPI data added weight to the Federal Reserve’s gradual rate hike views, while the U.S. Dollar capped its strongest week since June. For the week, the U.S. Dollar Index gained 1.26% to end the week at 96.357, while the yield on 10-year Treasury notes fell 5.3 basis points to 2.874%.


 What We’re Reading

Merkel on Turkey’s Central Bank

California Seeing Tariff Pains

OPEC Cuts its 2019 Demand Outlook

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 Week’s Economic Calendar

Monday, August 13: No Major Releases;

Tuesday, August 14: Small Business Optimism, Import & Export Prices;

Wednesday, August 15: Empire Manufacturing, Worker Productivity & Costs, Retail Sales, Industrial Production, Business Inventories, Housing Market Index;

Thursday, August 16: Jobless Claims, Philadelphia Fed Business Outlook, Housing Starts;

Friday, August 17: Leading Economic Indicators, Consumer Sentiment.

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 Market Watch
Dow Jones-0.59%-0.40%2.32%2.40%15.89%
S&P 500-0.18%0.70%4.58%7.21%18.48%
Russell 3000-0.02%0.85%4.67%7.55%19.17%
MSCI EAFE-1.46%-2.64%-3.91%-2.98%3.95%
MSCI Emerging Markets-0.99%-2.22%-7.04%-6.72%2.93%
Barclays Agg Bond0.42%0.52%1.28%-1.08%-0.62%
Barclays Municipal0.16%0.05%0.89%0.05%0.60%
Barclays US Corp High Yield0.12%0.28%1.60%1.54%3.54%
Bloomberg Commodity-0.75%-1.31%-6.52%-3.42%2.39%
S&P GSCI Crude Oil-2.06%-2.45%-5.95%11.02%37.72%
S&P GSCI Gold-0.34%-1.18%-8.16%-6.90%-5.51%
Source: Morningstar
Chart of the Week
More Positive Months for Stocks
View larger image »

U.S. stocks have been confronted with rising bond yields, widening credit spreads, an uptick in inflation, and the constant threat of a trade war breaking out between the U.S. and China. Despite these risks, the S&P 500 has grinded higher thanks to strong earnings growth that has exceeded 20%, tax reform for corporations and individuals, and strength in the economy. From a performance perspective, returns have been solid and the S&P 500 has almost fully recovered from the February correction. The market felt volatile over the first few months of the year, especially in comparison with 2017's calm, but this year has turned out to be a rather "normal" by historical standards.

Chart 1 above displays the number of positive and negative months for the S&P 500 in each calendar year since 1990. The only year where stocks were positive every month was 2017. Since 1990, the average number of negative months for stocks has been 3.6, or roughly three to four times a year. Years which have resulted in negative performance for stocks, like 1990, 2000-2002, and 2008, witnessed six or more months of negative returns. So far this year, the S&P 500 has recorded five positive months and just two negative months. Both figures are on track to finish at a level that is near the average since 1990. We may experience additional volatility going forward as the Fed normalizes interest rates, but that is a typical occurrence as a bull market matures.

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The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years. This total return unhedged index was created in 1986, with history backfilled to July 1, 1983 and rebalances monthly.

The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. Many of the subindicies of the Municipal Index have historical data to January 1980. In addition, several subindicies based on maturity and revenue source have been created, some with inception dates after January 1980, but no later than July 1, 1993. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 12.8 years. This total return index is unhedged and rebalances monthly.

The Bloomberg Commodity Index is a broadly diversified index that measures 22 exchange-traded futures on physical commodities in five groups (energy, agriculture, industrial metals, precious metals, and livestock), which are weighted to account for economic significance and market liquidity. No single commodity can comprise less than 2% or more than 15% of the index; and no group can represent more than 33% of the index. However, between rebalancings, group weightings may fluctuate to levels outside the limits. The index rebalances annually, weighted 2/3 by trading volume and 1/3 by world production.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Introduced in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the Uninted States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Eygpt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.

The MSCI Pacific Index captures large and mid-cap representation across five Developed Markets (DM) countries in the Pacific region. With 470 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P GSCI Crude Oil Indexis a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the crude oil market.

The S&P GSCI Gold Index a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold futures market.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.