The summer wind. Or at least the last puff of it propelled the once lagging Dow Jones Industrials to another new high on Friday capping off a hot summer for stocks. Yes, once again the industrials muscled to a new high as continued euphoria from earlier in the week spilled over into Friday’s equity session. The question remains whether the euphoria is justified. Recall that I have been repeating that a lot of the back and forth news and soundbites should be treated as secondary information and that investors should make decisions on actual data. The Dow has been held back for most of the summer as the other major indices rallied over and over due to its strong reliance on international trade. I believe that much of the daily ups and downs related to the news were unjustified as the actual effects of any tariffs have yet to appear in either economic releases nor corporate earnings. Now, it is important to recognize that there will be a butcher’s bill to pay at some point, because as I have also posited in many of my notes that tariffs do ultimately increase costs to producers and ultimately consumers and drag on economic output. The big question has been and still remains: when. Early last week the first real wave of tariffs was placed on Chinese imports as the President announced a 10% tariff on $200 billion in goods (with some exceptions). The markets’ initial response was positive as many were expecting the tariff to be 25%, which it will ultimately get to if the dispute is not resolved by year end. No sooner had the announcement been made did the Chinese government fire back with some excise taxes on US goods, in effect, escalating the trade war. By the time the second announcement came, the Dow Jones was not looking back, chains cast off, the index gunned for two fresh all time highs. As much as the Dow’s underperformance earlier in the summer was the result of unfounded apathy, last week’s rally was the result of overzealousness. The good news is that the Dow will most likely revert to the mean (which can be a geek-out Wednesday topic, but it's too early in the week to commit) and begin to trade normally once again. While we are on the topic of the Dow, it has no real support until 26500, 26000 (which are both weak) and its new Fibonacci retracement line at 25790, which means a fall from grace could be a bit dizzying (see chart 6 in my attached daily chartbook). The index will need to pull back and consolidate before resuming an orderly climb. The broader S&P 500 flirted with new highs on Friday but ultimately closed down around its session lows. The large cap index, like the Dow, is trading in new territory with very little support below. It too will seek to consolidate and build a solid base to grow on. Last week was principally all about the large cap industrials and financials and it shows when one observes the price action in the Russell 2000 and the NASDAQ 100. Both indices struggled to make big gains last week, which is in sharp contrast to earlier in the summer where they drove the herd. All the equity indices remain constructive. A result of last week’s euphoria in Equities, which by the way was also helped by a weakening dollar (see chart 13 in my attached daily chartbook), bond yields rallied into Friday. We start the week with 10 year yields around 3.08% and the 2/10 yield curve slightly steeper at 26 basis points.
The day ahead in equities will reflect a summing up of the weekend press, which included lots of political wrangling as well as an announcement that the Chinese have cancelled a trade meeting set for this week. Starting tomorrow the release calendar really picks up and the UN General counsel meetings will generate plenty of fresh soundbites, so we can look forward to a week of volatile trade. On the docket is consumer confidence, New Home Sales, the FOMC rate decision with press conference, GDP, Durable Goods Orders, Personal Income/Spending, core PCE deflator, U Mich. Sentiment, and ISM Manufacturing. Please refer to the attached economic release calendar for the full list of releases including dates and projections (I attach this every Monday). As the quarter draws to a close, we get the last few earnings announcements, which are still a factor (that calendar is also attached every Monday). This week we will hear from Nike (which should be interesting in the shadow of recent controversial marketing and last week’s rally in competitor Under Armor), Bed Bath and Beyond, Carnival, Rite Aid, and Conagra. So, there will be no lack of market moving information in the week ahead causing many traders to long for the days of the summer, now just a memory.