Equities advanced early in the week as traders awaited comments from Federal Reserve chairman Jerome Powell at the central bank convention in Jackson Hole, Wyoming. Powell stuck to his message to “act as appropriate to sustain the (economic) expansion”. Markets reacted positively until Friday, when the Chinese imposed new tariffs on $75 billion of U.S. goods. President Trump escalated tensions by increasing tariffs on Chinese imports another five percent and suggested that U.S. companies find an alternative to China for doing business. The Dow Industrials plummeted 623 points or 2.4%. For the week the Dow dipped one percent and the S&P 500 by 1.4%. The tech-driven Nasdaq lost nearly 2% for the week and transports were in the red by 2.3%. While utility stocks were flat, all other market sectors were negative led by basic materials, energy and health care all lower by over 2%. Technology names were also weak and gave back 1.6%.
It now seems unlikely that China and the U.S. will come to some sort of cease fire on trade any time soon. At the G-7 meeting in France over the weekend, the President regretted his remarks only to say he wished he had raised tariffs even higher. Here at home the picture is somewhat mixed, with good news on the jobs front, strong trends in retail, choppiness in housing (with building permits up in August, while housing starts were down), a slowdown in industrial production and an accommodative Federal Reserve. Inflation remains low as the Producer Price Index advanced 0.2% in July. That modest uptick followed even more muted gains of 0.1% in May and June. Meanwhile, if we back out food and energy – to get the so-called core PPI – we find that prices declined last month. Finally, there is the sharp drop in interest rates, which could be flashing warning signs on growth.
Price-to-earnings ratios, while not cheap, are certainly not reflective of an undervalued market and are still reasonable enough to suggest further equity gains. In sum, investors should focus on the healthy fundamentals now in place for stocks and look beyond the short-term headlines and resulting upheavals that can affect day-to-day trading.
Today’s Trivia Question: Days Inn, Ramada and LaQuinta are hotel brands of what company? InterContinental Hotels Group, Hilton Worldwide, Choice Hotels International or Wyndham Hotels & Resorts.