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Short Holiday Week, Some Fireworks, Markets Up

| July 09, 2018
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Markets ignited a display of volatility fireworks but managed a gain for the holiday-shortened week. Trading volumes were predictably low, especially on the two days surrounding the July 4th holiday, with markets closing early on Tuesday. Continuing the pattern of recent months, the technology-heavy Nasdaq Composite Index and the smaller-cap benchmarks outperformed.

After a slow start on Monday due to sluggish data out of China and trade war concerns, a surprisingly strong report on U.S. manufacturing activity turned things around, and markets closed up on the day. The momentum continued when trading resumed on Thursday, but volumes remained well below average as many investors enjoyed an extended holiday.

Observers noted that many on Wall Street were reluctant to act in advance of the U.S. imposition of tariffs on China on Friday, as well as the Labor Department’s important monthly employment summary. In spite of those headwinds, investors actually in the office on Tuesday pushed the S&P 500 to its best daily gain in a month, with sentiment buoyed by a strong service sector activity reading.

With strong manufacturing and service data in hand, the drumbeat of solid economic news continued when Friday’s payrolls report came in a bit stronger than expected, helping end the week on a positive note. Employers added a healthy 213,000 jobs in June, and previous months’ gains were revised higher. The unemployment rate rose from an 18-year low of 3.8% in May, climbing to 4.0% in June, but the increase was due to a jump in people entering the labor force, a very positive sign.

On Thursday, the Federal Reserve released the minutes of its June 12-13 policy meeting. The minutes revealed that policymakers had shifted their perceived distribution of risk away from the upside and indicated that officials now believe risks to economic growth appear more broadly balanced. In particular, Fed officials highlighted the possibility that growing trade frictions would weigh on business sentiment and investment spending. Policymakers also voiced concerns over the potential downside risks to economic growth and inflation due to economic developments in Europe and emerging markets.

It will be important to track business sentiment in the months ahead for signs that trade restrictions are curbing investment plans. For now, Fed surveys of regional manufacturing and services firms indicate that capital spending plans, while off their highs reached at the start of the year, have stabilized at levels consistent with continued moderate growth in business fixed investment. 

Across the pond, European equities ended the week mixed as trade talk continued to dominate market sentiment. Markets began the week in negative territory as President Trump threatened withdrawal from the World Trade Organization and emphasized plans that his next tariffs would likely target automobiles. The European Union (EU) countered with threats to levy measures on nearly $300 billion of U.S. goods. Many sectors traded in negative territory early in the week before gaining ground after trade tensions eased following a positive reception from lobbying efforts and proposals for the EU and the U.S. to mutually lower tariffs.

“Mutually lowered tariffs” – we like the sound of that. Ok, everyone, the holiday week is over. Time to get back to work.

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