It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that. – Charlie Munger
The major stock averages were headed for solid gains last week before news broke on Friday that the Turkish lira plunged 14% after the Trump administration authorized the doubling of metals tariffs on that country. The action was taken because Turkey has detained an American pastor since 2016 on suspicion of supporting a failed coup attempt. Congress and the Trump administration have also objected to Turkey’s plan to use a Russian missile defense system. Turkey’s central bank refused to raise interest rates to support its currency and the weakness fueled inflation fears and concerns that it would be more expensive for Turkey to repay its large foreign currency denominated debt. The S&P 500 dropped 20 points or nearly 0.75% on Friday to close modestly lower for the week while the Nasdaq Composite Index managed to eke out a small gain. Prior to this news, the markets had been climbing higher on continued strong second quarter earnings reports. By week’s end, nearly 90% of S&P 500 companies had reported earnings and 76% of them had topped analysts’ estimates. Not since 2008 have so many S&P 500 companies exceeded expectations. Quarterly earnings have risen 24% on a year-over-year basis and revenue growth has also been strong. With earnings season winding down, global trade tensions could once again take center stage, but even that seemed to take a back seat last week. China announced a 25% tariff on $16 billion worth of U.S. goods to combat a total of $50 billion worth of Chinese goods that are subject to U.S. tariffs. While market sentiment remains favorable due to strong earnings and favorable economic data, uncertainty regarding trade, Federal Reserve monetary policy and unforeseen geopolitical risks could lead to increased volatility and limit future gains.
Investors were given a good read on inflation last week and the results were generally in line with expectations. The producer price index (PPI) was unchanged in July, which was better than expected, and the core PPI (excludes food and energy) has now risen 2.8% in the 12 months through July. As expected, the consumer price index (CPI) rose modestly and in the 12 months through July, the core CPI has risen 2.4%. The increase in inflation should be viewed as a positive sign for the U.S. economy. For the third straight month, the Labor Department reported that there were more job openings than there were people looking for work. The weekly jobless claims fell 6,000 to 213,000 compared to 220,000 that were forecast as the job market remains very strong.
For the week, the Dow Jones Industrial Average fell 0.6% to close at 25,313 and the S&P 500 Index slipped 0.2% to close at 2,833. The Nasdaq Composite Index bucked the trend and gained 0.3% to close at 7,839.
Import prices for July are expected to post a slight decline, providing further evidence that inflation remains in check. Both July retail sales and industrial production are forecast to increase slightly from the previous month while July leading economic indicators are expected to register a moderate increase. July housing starts should top those reported in June and the August University of Michigan consumer sentiment index should remain elevated and on a par with the reading in July.
Retailers will headline this week’s earnings reports and the most notable of these include Home Depot, Walmart, Macy’s, JC Penney and Nordstrom. Other prominent companies on the earnings agenda include Cisco Systems, Applied Materials, Agilent Technologies, Deere & Co., Briggs & Stratton and Sysco.
After being the best-performing asset class in 2017, international stocks have fallen on hard times and have underperformed the S&P 500 Index by a wide margin this year. The MSCI Emerging Market Stock Index has declined by 7% while the MSCI EAFE (Europe AustralAsia and Far East) Developed Markets Index has lost 3% this year compared to a gain for the S&P 500 Index of 7%. The strength of the U.S. economy coupled with the Federal Reserve’s interest rate hikes have caused a surge in the dollar and weakened foreign-market currencies like that of Turkey. Weaker currencies mean that it will cost those countries much more to service their dollar-denominated debt and hurt their economic growth. Economies in Europe have also experienced a slowdown and are more susceptible to global trade tensions than the U.S. Despite this slowdown, though, global economic growth remains above-average as fundamentals in emerging market economies remain positive. Europe has also stabilized based on recent favorable economic data and consumer confidence is still strong. The drop in the value of the euro should also be a positive as European companies that export abroad stand to benefit with higher earnings. From a valuation standpoint, foreign stocks are as cheap as they have been in a long time. The MSCI EAFE Index currently trades at about 14 times estimated forward earnings while the MSCI Emerging Market Stock Index trades at only 11 times earnings. Both of these benchmarks are trading considerably below the price earnings ratio of approximately 17 for the S&P 500 Index. Although international equities are fraught with geopolitical risk, currency volatility and debt issues, they still should be an integral part of an investor’s portfolio. Looking forward, they may be due for a rebound and a period of outperformance relative to the U.S. market.