American Consequences - July 2018

THE BIGGEST STORIES THAT MATTERED FOR THE MARKET LAST MONTH

WHAT MOVED THE MARKET

The Fed is bullish on the economy and wants to maintain a healthy investment environment. COMMODITIES AND GLOBAL MARKETS LAG, BITCOIN RALLIES... Global markets have trailed behind the U.S. market. As trade-war noise fades, buyers have waded back into Europe and Japan, and Chinese markets have stabilized. But there has been a lot of technical damage done to the indexes, and absent a trade resolution, these markets will remain in limbo. A strong U.S. dollar, increased oil inventories, and news that OPEC and Russia were relaxing supply agreements has weighed on commodities like gold and oil. Copper has been hovering at yearly lows, and this is a direct proxy for Chinese demand (or lack thereof). Bitcoin twice held its $6,000 level before rallying 15% due to BlackRock’s consideration of bitcoin as a viable product for clients. THE MARKETS HAVE IGNORED GEOPOLITICS, BUT CONCERNS REMAIN... Earnings projections for the S&P 500 Index are rising, and the focus is shifting from this year’s multiple to next year’s. From a

THE BACKDROP FOR U.S. MARKETS REMAINS A FORTRESS... Second-quarter GDP projections expect growth of 4% to 5%, and second-quarter earnings forecasts are for 20% year-over-year growth. That comes on the heels of 24.8% growth in the first quarter. Over the past five years, analysts’ earnings estimates have been 4.4% too low at the outset of the quarter. So, by the end of this quarter, it’s reasonable to expect earnings growth closer to 24.4%. Unemployment remains at record lows, and more people are looking for jobs. Discretionary spending has picked up, along with stock buybacks and dividend increases. Trade skirmishes have continued to dominate the headlines, but the amount of goods targeted is minor considering the $19 trillion U.S. economy only imports about $2.4 trillion of goods per year. Investors believe that trade deals will be worked out, and the focus has remained on an economic climate that is still conducive to asset price appreciation. Technology has continued to lead. The combined market cap of the “FAANGM” group of stocks (Facebook, Amazon, Apple, Netflix, Alphabet, and Microsoft) is about the size of Japan’s GDP at $4.2 trillion. Financial

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valuation standpoint, the S&P 500 is trading at 15.96 times forward estimates. In historical terms, this is reasonable. Over the past five years, the average multiple has been 16.2 times.

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stocks have bounced back on decent earnings, steady interest rates, and a recent statement by the Federal Reserve that it’d back off raising rates if need be.

12 July 2018

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