HIGHLIGHTS

• Markets are up around the world, US +1.03% and international +1.69%.
• The S&P 500 hits an all-time high.
• Bad political news in Washington.
• The US and Mexico are closing to finalizing an agreement on NAFTA.

MARKET RECAP

The S&P 500 closed at an all-time high, finishing at 2,874.60 on Friday. That beat out the previous high on January 26 of 2,872.87. Overall, US markets were up 1.03% and international stocks jumped 1.69%.

BAD POLITICAL NEWS

Markets advanced despite a swirl of bad political news, even by the standards of the Trump administration. Trump’s so-called “fixer” and former lawyer pled guilty to bank and tax fraud, campaign finance violations and said that Trump had directed him to pay money to two women to keep quiet on past relationships. Then former campaign chairman Paul Manafort was convicted on 8 different charges. It was reported that David Pecker, CEO of American Media (National Enquirer) and Allen Weisselberg, CFO of the Trump Organization, had received immunity from prosecution.

Pepsi said it would buy SodaStream International for $3.2 billion.

US / MEXICO

It is reported that the U.S. and Mexico are close to finalizing a NAFTA deal as soon as Monday. Breakthroughs in automobiles and energy and helping accelerate the talks. Canada would next need to get on board after the US and Mexico reach an agreement.

SCOREBOARD

HIGHLIGHTS

• US and international stocks continue in different directions, US +0.63 and international down 0.80%.
• Leveraged loans might be a fault line in the next recession.
• Retailers report good results.

MARKET RECAP

US equities were up by 0.63% for the week but that hid some wild swings. Stocks fell hard on Wednesday, worries about Turkey and falling commodity prices spooked markets, at the low point equities, were down by 1.37%, but they rallied into the close and finished off by 0.79%. A Thursday rally made up for most of the loss, stocks increased by 0.78%. The Dow had its biggest increase in four months, up by 1.58%. The rally was spurred by word that there would be a resumption of trade talks between the US and China later in the month. Solid retail earnings reports (see below) also helped.

As it stands now, the S&P 500 is just 0.80% off its all-time high. International stocks fell again, down 0.97% on the week and they are now down almost 5% for the year. Emerging market stocks have fallen even more, down about 10%. The Vanguard Emerging Markets Index Fund (VWO) sells at a forward price to earnings ratio of 12.5 and there are value-oriented emerging markets funds that now sell at a forward ratio of less than eight.

LEVERAGED LOANS

Leveraged loans might be the fault line that cracks in the next recession.  The popularity of the loans has increased in recent years given their ability to protect investors in a rising rate environment. But the loans, which investors effectively invest in through popular ETFs and mutual funds, present a potential mismatch if investors begin to sell their positions faster than the loans can be liquidated. Selling a loan is not the same as selling a stock or a treasury bond. Another problem is the loans being marketed now do not have as many covenants as in past years. That means that in the event of bankruptcy, the loans are protected by fewer assets than was traditional in the past.

Moody’s estimates future recoveries at 32% versus 40% in the past.

For the time being, the economy remains strong, but leveraged loans could become a problem down the road.

RETAILERS REPORT GOOD RESULTS

Solid results by Walmart, Nordstrom and other retailers indicate the economy remains strong. A combination of tax cuts and rising wages have helped sales rise at Walmart, Nordstrom, Home Depot and Coach. Walmart’s sales in the last quarter increased by the most in over a decade. Walmart’s e-commerce sales were up by 40%. But not all is perfect, sales at Macy’s were up just 0.5% and they were down at JC Penny.

JOBLESS CLAIMS

New unemployment claims fell by 2,000 to 212,000 indicating a continued strong labor market.

SCOREBOARD

MARKET RECAP

Turkey’s currency, the lira, dropped by more than 14% on Friday as their President instructed citizens to sell the dollar and gold and buy the lira. President Recep Tayyip Erdogan said that “This will be in response to those who have declared an economic war.” He blamed the “interest rate lobby” that wants Turkey to raise interest rates.

Trump later tweeted “I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency…slides rapidly downward.” Combined, the dual Presidents comments led to a sell-off around the world.

In recent years Turkey appeared to have a strong economy. But that was a disguise, as the economy was boosted by taking on heavy debt denominated in foreign currencies. Now the bill is due and as the lira falls, the pain increases.

US stocks did not suffer much, finishing just about even for the week. The damage was overseas where international equities dropped by 2% and emerging markets were down 2.3%.

BULLISH BETS START TO PILE UP

As US stocks were close to records on Thursday, traders were wagering big on a continued bull run. Bullish call options, which cash in on higher prices, have increased in volume on the S&P 500. At the same time, bets on low volatility have hit the highest level since November, according to the Commodity Futures Trading Commission, indicating that traders expect the market to move slowly higher.

SCOREBOARD

HIGHLIGHTS

• US stocks increase by 0.72% but international stocks fall by 0.81%.
• Another strong payroll report.
• The ISM Manufacturers Index falls by the most in two years and hits a 3-month low, but the level is still high.
• More tariff threats between the US and China.
• The price to sales ratio is approaching highs last reached around 2000.
• Apple becomes the first company to be valued at $1 trillion.

MARKET PERFORMANCE

US and international markets split ways again, with the US up by about 0.72% and international markets down by 0.81%. There was the normal back and forth on tariff threats with China, but the market does not seem so concerned. A solid payroll report showed that the labor market continues to be tight. The only kink in the armor of the strong US economy was a fall in the ISM Manufacturing Index to a 3-month low. But the reading of 58.1 is still extremely strong. Apple won the race to the $1 trillion valuation, hitting the mark on Thursday.

PAYROLL

Nonfarm payrolls increased by 157,000 and the two preceding months were revised up by a total of 59,000. So far, the tariffs do not seem to have impacted hiring. Average hourly earnings were up 2.7% compared to last year. One factor holding down bigger increases in average earnings is that employers have been hiring less educated, lower paid workers to fill job positions. A related factor is an increase in jobs for the 25 to 34-year old’s, they are replacing older, higher paid employees as they begin to retire. The unemployment rate dropped to 3.9%. Overall, the labor market continues to be strong.

ISM

The ISM Manufacturing Index fell by 2.1 points in July, the most in almost two years, to 58.1. The reading was a three-month low and indicates some moderation in factory activity. Despite the decline, the overall level of 58.1 is still a very strong number and indicates continued growth for Q3 although probably weaker than Q2.

The report stated that “respondents are again overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.”

TRADE

The back and forth that trade wars are known for continued this week. The White House threatened to increase tariffs to 25% on $200 billion of Chinese goods from the previously announced amount of 10%. China responded on Friday saying that it would increase tariffs up to 25% on $60 billion of US products. These tariffs are supposed to go into effect in September. The Chinese yuan is down 7% versus the dollar over the last two months. That will help the Chinese deal with the higher tariffs.

If Chinese exports are hurt by the trade war, the government might be inclined to stimulate the economy by taking on more debt. The problem is that China is close to being maxed out on debt. Pushing China over the edge into a full-blown debt crisis would likely lead to problems throughout the global economic system.

VALUATION

There are lots of metrics out there showing that the market is overvalued, and some showing it is fairly valued, but here is one that indicates the market is way overvalued. Price to sales on the S&P 500 is at about 2.2, near the highest level since 2000.

APPLE

On Thursday Apple became the first company to reach a valuation of $1 trillion. Apple trades just under the S&P 500 index multiple, selling at 15.8 forward earnings.

SCOREBOARD