As North Korean dictator Kim Jong Un pulsed back from recent threats aimed toward the US early last week, the overall stock market initially surged. Hopes for a diplomatic solution to the recent back and forth war of words between the US and North Korea suddenly appeared more plausible. Yet President Trump quickly reminded investors that he can be a distraction and tail risk following what appear to be less than calculated remarks in response to recent extremist violence occurring on our own soil in Charlottesville, VA. His reaction to the tragedy seemed to be the final straw for many on his business advisory councils, and is perhaps a good barometer for just how isolated he is making himself from both legislators as well as the broad public. Investors by extension, are solidly of the perspective that any meaningful pro-growth policy achievements campaigned upon and celebrated in the immediate aftermath of the November election now have virtually zero chance of advancing. On that deepening belief, US equity markets slid sharply again late-week with the S&P, Dow, and Nasdaq each finishing lower by between -0.6% and -1%; that marks another consecutive weekly decline to US.
Outside of the political mess that seems to continue circling (or be self-inflicted) Trump, fundamental data in the latest week was supportive of a view that the global economy is on sound footing. US retail sales advanced +4.2%; Chinese retail soared +10.4%; consumer sentiment is up high single-digits while the money supply is also on the rise despite slowly climbing interest rates (suggesting velocity of money is picking up slightly). Wage data shows that workers are seeing bumps in pay that slightly outpace reported inflation. And Eurozone real GDP is up roughly 2%. Corporate earnings reports, while weaker in these last couple weeks (very normal during the later weeks of reporting season), are concluding the 2Q in aggregate strongly ahead of last year. Admittedly, 3Q will present harder comparisons to year-ago results than enjoyed during the first half of 2017.
In recent years, the month of August has not been kind to global investment markets (stocks in particular). Low summer trading volume tends to amplify negative developments. And following months of extraordinarily low volatility, recent sharp dips feel even more alarming; this is especially the case against a growing count of scary news stories proclaiming that the bull market (usually referred to as only a rally) is highly fragile. For example, the markets logged several new all-time highs in one week during the month of July, and no mention was made of it by the mainstream media. Negative stories seem to ignore how this bull market has recovered from dozens of major shocks in the last 8 years. This is not to suggest that investors should dismiss recent troubling developments. In fact, elevated valuations while not a useful market timing tool do imply that forward returns look muted. Still, reviewing valuations relative to historical averages inside a vacuum ignores the fact that investors still have few viable alternatives for where to allocate savings in pursuit of real (after-inflation) returns considering that bonds and cash yield almost nothing after the effects of inflation. We believe that growth of corporate earnings must continue to facilitate this bull market enduring longer, and the economy remains highly dependent on consumer and business confidence staying accommodative. But amid recent signs that economic conditions continue to improve internationally, US demand should also remain healthy. Continued skepticism over the durability investment assets also likely affords this bull market more time and keeps the risk of full-blown bubbles low. Taken with the acknowledgment that investors believe pro-growth US fiscal policies are dead in the water (and been fully removed from asset prices in the months since inauguration), a positive surprise in the form of tax reform or repatriation, or any reduction in regulatory burdens could setup stocks to receive another nice leg up. Short-term, rising volatility and still-low trading volume keep this market vulnerable in the month or so ahead.