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.

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