The last week’s market highlights:
Quote of the week:
“Adversity causes some men to break, others to break records.” – William Arthur Ward
Each week, we present our featured topics in the context of the major themes listed below from the Nuveen Midyear Outlook:
- U.S. economy: Running ahead of its peers.
- Global economy: Trade a bigger concern outside the U.S.
- Policy watch: Central banks aren’t all on the same wavelength.
- Fixed income: Starting to prefer higher-quality assets.
- Equities: Earnings are supporting prices, but expect plenty more volatility.
- Asset allocation: Remain risk on, but focus on quality.
Equities: Small caps put muscle in the Russell, and the S&P 500 hits a lengthy milestone
With relative quiet, the small-cap Russell 2000 Index hit a series of record highs last week. Given their domestic focus, small-cap stocks have benefited from the improving economy. In addition, because of their generally low exposure to exports, smaller companies have tended to be more insulated from revenues denominated in foreign currencies. This has been a boon for small caps as the dollar, despite a recent slump, has strengthened 8% since mid-February against a basket of currencies. (In contrast, a rising dollar hurts sales and profits of multinationals, which are typically larger-cap, by making their exports less competitive in overseas markets.) Add in a stellar Q2 earnings season and it’s not surprising that for the year to date, the Russell 2000 has outperformed the large-cap S&P 500, 13.2% to 8.8%.
With great fanfare, the S&P 500 reached a milestone of its own last week: the longest bull market on record. Since bottoming on March 9, 2009, through August 22, the index logged 3,453 consecutive days without falling into a bear market, broadly defined as a 20% decline from a previous high. This eclipsed the S&P 500’s prior record set from 1990-2000, which ended with the bursting of the tech bubble.
A number of market commentators have disagreed with the “longest-ever” title, citing differences over how to define a bear market and when the bull market actually began, among other issues. Those arguments notwithstanding, U.S. stocks have delivered impressively over the past 9½ years, with the S&P 500 gaining a cumulative 325% (on a price-return basis) through August 24, easily outpacing Europe’s STOXX 600 Index (+143% in local terms) and Japan’s Nikkei 225 Index (+219% in yen terms).
Looking ahead, we believe this bull market could extend through the remainder of the year and into 2019, supported by ongoing strong earnings growth. While companies are unlikely to continue growing profits at a 20%+ year-over-year clip, as they’ve done in the first two quarters of 2018, we expect tailwinds provided by corporate tax cuts and steady global growth to support further healthy gains. The path higher for stocks is unlikely to be a straight one, however. Volatility should pick up, a common occurrence during the late stages of a bull market.
An escalation of tensions between the U.S. and its major trading partners poses the greatest risk to stock market performance, in our view. Although the U.S. economy has thus far shrugged off meaningful negative effects from contentious trade policy, a 25% tariff on another $16 billion of Chinese goods went into effect last week, as did a similar levy from China on U.S. exports. Two days of low-level talks between the two sides failed to yield any progress on the trade standoff.
Fixed income: A dose of “Fedspeak” to end the week
In a highly anticipated speech given at the Fed’s annual symposium at Jackson Hole, Wyoming, Chair Jerome Powell stated that the Fed doesn’t expect inflation to accelerate above its 2% target. While downplaying the risk of the economy overheating, he offered support for the current, gradual approach to raising interest rates. Powell also gave a nod to global risks, providing cover should the Fed decide to pause its rate hikes.
Markets interpreted these comments as dovish, sending both Treasury yields and the dollar lower on August 24. For the week as a whole, the yield on the bellwether 10-year note fell 6 basis points, to 2.81%, a three-month low. (Yield and price move in opposite direction.)
Among non-Treasury sectors, investment-grade corporate bonds registered their fifth consecutive weekly advance. Market technicals, including low supply, have been supportive. Meanwhile, high-yield bonds have yet to post a negative weekly return in the third quarter. They also have benefited from subdued issuance, as well as from a strong U.S. equity market.