Equity markets posted gains last week on generally upbeat economic data in both the U.S. and abroad. A renewed push in Washington on tax reform also served to bolster equity markets, particularly smaller cap companies who generally do not spend as much money lobbying D.C. to create and exploit tax loopholes. Crude oil traded down on the week while refined products (gasoline, heating oil) rose sharply in response to refinery disruptions from Hurricane Harvey.

Weekly Anecdotes:

  • Last week saw Hurricane Harvey deliver a tragic blow to the Gulf coast and our sympathies go out to all families impacted. Bespoke attempted the difficult task of estimating the economic impact. They estimate that local area Q3 GDP will fall by 0.5% quarter over quarter due to reduced consumer spending and jobless claims will obviously increase sharply. The Houston area labor market is not too significant in the national picture but it represents 2.7% of U.S. GDP so the impact on both labor and GDP will be felt but not materially.
  • North Korea upgraded their typical bluster to something more concerning last week as they launched a missile over Japan on Tuesday despite threats of military mobilization by the U.S. Equity markets seemed disinterested, as volatility moved higher on the news but quickly reverted. Safe haven bonds did garner strong bids on the news – the 10yr U.S. treasury bond closed the week at its lowest yield of the year.
  • Tech and biotech heavy Nasdaq broke out to new highs this week and the S&P 500 sits only a few points away from new all-time highs.
  • In the spirit of the stock market almanac as we enter September, it should be noted that it is easily the worst month of the year for the stock market. Had you invested $100 in the S&P 500 only during September over the past 50 years, your $100 would now be worth $71.
  • The U.S. dollar touched its lowest level in two years last week and is off 11% versus the Euro this year. Accordingly, the decile of stocks with the highest international revenues are up 19.87% this year.
  • Optimism about Chinese growth and the weak U.S. dollar has driven Dr. copper up to a 3 year high. The benchmark industrial metal is up 20% since May.
  • The bond market is trading as if soft wage data in the August employment report may press the Fed to pause their rate hike cycle in December. However, balance sheet reduction still seems likely to begin in September.

Economic Updates:

  • The second estimate of second quarter GDP added 0.4% to the original reading of 2.6%. A 3% GDP figure is an encouraging mark for the second quarter. Third quarter forecasts call for similar growth rates of approximately 3.2%.
  • August job growth of 156,000 missed expectations for 180,000 but is a decent result given the U.S. is at full employment. The official unemployment rate rose 0.1% to 4.4%.
  • Concerning takeaways from the August employment report were downward revisions to June and July overall payrolls of -41,000 and continued soft wage growth of 0.1% m/m and 2.5% y/y. A positive data point of the report was a 36,000 surge in manufacturing payrolls and upward revisions to June and July manufacturing payrolls of +19,000.
  • The August ISM manufacturing index registered 58.8, well over expectations of 56.6. Production and new orders both registered over 60 for the third straight month and have the ISM registering its highest level since April 2011!
  • July Core PCE, one of the Fed’s preferred inflation measures, remained benign at 1.4% y/y.