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Week in Review: August 14, 2017


What's Important

Rising tensions over North Korea drove stocks lower as investors move to safer assets


Meanwhile, corporate earnings continued to grow and inflation stayed low



Rising tensions between leaders in North Korea and the U.S. upset the summer calm, sending prices for global stocks down and U.S. Treasury bonds up. Although North Korea has been a geopolitical hot spot for some time, the current flare-up took a turn for the worse after President Trump gave unscripted remarks, threatening North Korea. The language took the stock market by surprise, triggering a week long decline that only appeared to subside on Friday.


Tough Talk


Asian stocks bore the brunt of the crisis with the MSCI Emerging Markets index, one of the best performing indexes year-to-date, down 2.2%. Developed international stocks performed slightly better with the MSCI EAFE down 1.5%, while US stocks fared best, with the S&P 500 down 1.4%.

The market has largely ignored debates in Washington. However, geopolitical headlines tend to add market volatility. We would be foolish to attempt to time geopolitical surprises and focus on short-term trading. Instead, we emphasize market and macroeconomic fundamentals. Here, the news for the week supported equities.  

The second quarter earnings season wrapped up on a strong note. As of August 11th, 91% of companies in the S&P 500 had reported actual earnings and 73% of companies reporting exceeded estimates. In aggregate, second quarter earnings beat estimates by an average of 6.1%, pushing the overall earnings growth rate to 10.2%.

U.S. Treasury bond prices received another boost from inflation data which continues to come in weaker than expected., Core producer prices for July rose 1.8% (versus expectations of 1.9%) and on Friday core consumer prices for July came in at 1.7% (versus expectations of 1.8%). This is the fifth consecutive month that both readings have come in weaker than expectations. Not surprisingly, market expectations for another hike in the Federal Funds rate in December fell to 33% this week (from over 40% in late May).

 

 



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

-1.5%

1.6%

13.2%

14.2%

S&P 500

-1.4%

1.0%

10.4%

14.0%

Dow Jones Industrial Average

-0.9%

2.7%

12.3%

20.4%

NASDAQ

-1.4%

2.0%

17.0%

21.0%

Russell 2000

-2.7%

-2.8%

2.0%

13.4%

MSCI EAFE

-1.5%

2.0%

16.1%

15.2%

MSCI Emerging Markets

-2.2%

3.7%

22.8%

17.5%

Hard Assets

MSCI US REIT

-2.2%

-1.3%

0.7%

-5.5%

Alerlan MLP

-4.2%

-4.6%

-7.1%

-4.3%

Bloomberg Commodity Index

0.5%

1.5%

-3.9%

0.3%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.3%

1.0%

3.6%

1.0%

Bloomberg Barclays Intermediate Government/Credit

0.2%

0.8%

2.5%

0.6%

Bloomberg Barclays High Yield Bond

-0.8%

0.4%

5.3%

8.9%

JPMorgan GBI Emerging Markets Global Diversified

-0.2%

1.8%

12.4%

4.8%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,441.32

2,476.83

2,238.83

2,185.79

Dow Jones Industrial Average

21,858.32

22,092.81

19,762.60

18,613.52

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

2.19%

2.27%

2.45%

1.57%

Gold ($/oz)

$1,289.31

$1,258.88

$1,147.50

$1,338.78

Crude Oil ($/barrel)

$48.82

$49.58

$56.99

$48.98

U.S. Dollar / Euro ($/)

1.18

1.18

1.05

1.11

U.S Dollar / British Pound ($/£)

1.30

1.30

1.23

1.30

Japanese Yen / U.S. Dollar (¥/$)

109.19

110.69

116.96

101.96