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Week in Review: August 21, 2017

What's Important

President Trump’s political controversies further reduce the political chances of his pro-growth agenda


U.S., European and Japanese business activity surged, evidencing synchronized global economic growth


Domestic uproar followed President Trump’s remarks on the protests in Charlottesville, VA, triggering the resignation of several CEO-advisors to the President and creating further distance between the White House and Republican leaders. New fiscal policy uncertainty weighed on stock markets, especially small cap stocks (which could be key beneficiaries from the Trump agenda.) Further, terrorism in Spain rattled market sentiment. As a result, the S&P 500 finished the week down -0.6% and the Russell 2000 Index dropped -1.2%.  Developed international stocks (as measured by the MSCI EAFE) finished flat at 0.1% and emerging markets (as measured by the MSCI EM) continued to make gains, ending the week up by 1.6%.


Reassuring Signs of Economic Growth beneath the Headlines


Our investment approach emphasizes macroeconomic and fundamental factors over political controversies. Away from the turmoil in Washington, several indicators suggested that the synchronized global economic expansion remains intact, and may even be accelerating. U.S. retail sales for July surged the most in seven months while the figures for May and June, previously showing declines, were revised higher into positive territory. On the heels of the strong retail sales report, the Atlanta Federal Reserve’s estimate of GDP ticked higher from 3.5% to 3.7%. 

Further, signs in the overseas economies brightened. Japan, a perennial economic laggard, reported an increase in second quarter GDP of 4%, leap-frogging to the top of the G-7 in terms of economic growth. Economic growth in the Eurozone also picked up. Second quarter GDP for Europe grew 2.2%, better than expectations, moreover, the growth was widespread. Continued growth in Germany was coupled with Spain’s best economic performance in nearly two years, a resumption of growth in Italy, and a notable acceleration of economic growth in Eastern Europe. Separately the IMF revised its estimate of Chinese GDP growth this year from 6% to 6.4%.

Bond markets were relatively quiet, mostly since the minutes from the Federal Reserve contained few surprises. The minutes confirmed the Fed’s expectations that inflation will reach its 2% target “in the medium term” although reflected debate about why inflation retreated over the last five months. On the whole, the minutes reaffirmed the Federal Reserve’s previously held view that “economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate” and that balance sheet reduction would commence “relatively soon.”  Formal talks to renegotiate NAFTA—a process which could last a year or more—began on Wednesday. Looking ahead, we will be watching this closely given market concerns about the impact on global trade.

Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

-0.1%

1.5%

13.1%

13.9%

S&P 500

-0.6%

0.4%

9.8%

13.2%

Dow Jones Industrial Average

-0.8%

1.9%

11.4%

19.4%

NASDAQ

-0.6%

1.4%

16.3%

20.0%

Russell 2000

-1.2%

-3.9%

0.8%

11.3%

MSCI EAFE

0.1%

2.0%

16.1%

15.3%

MSCI Emerging Markets

1.6%

5.4%

24.8%

18.2%

Hard Assets

MSCI US REIT

0.0%

-1.3%

0.7%

-4.7%

Alerlan MLP

-3.3%

-7.7%

-10.2%

-9.2%

Bloomberg Commodity Index

-0.5%

0.9%

-4.4%

-3.4%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.0%

1.0%

3.5%

0.8%

Bloomberg Barclays Intermediate Government/Credit

0.0%

0.8%

2.5%

0.4%

Bloomberg Barclays High Yield Bond

0.0%

0.4%

5.4%

8.3%

JPMorgan GBI Emerging Markets Global Diversified

0.5%

2.3%

12.9%

4.8%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,425.55

2,441.32

2,238.83

2,187.02

Dow Jones Industrial Average

21,674.51

21,858.32

19,762.60

18,597.70

10-Year U.S. Treasury Yield (Constant Maturity)

2.19%

2.19%

2.45%

1.53%

Gold ($/oz)

$1,284.13

$1,289.31

$1,147.50

$1,352.36

Crude Oil ($/barrel)

$48.51

$48.82

$56.99

$52.95

U.S. Dollar / Euro ($/)

1.18

1.18

1.05

1.14

U.S Dollar / British Pound ($/£)

1.29

1.30

1.23

1.32

Japanese Yen / U.S. Dollar (¥/$)

109.18

109.19

116.96

99.89