Highlights
• After rising for most of the last few months, equity prices took a breather last week in the face of liquidity and trade worries.
• The U.S. economy appears to be reaccelerating and we see no imminent signs of a recession.
• Likewise, we think the risks for stocks are skewed to the upside and expect prices to rise modestly over the next year.
Investor sentiment was mixed last week. Negatives included concerns about market liquidity, sparked by the rising value of the U.S. dollar and fears of contagion from some emerging markets. Ongoing trade issues also posed a general concern, particularly fears surrounding a potential new round of U.S./Chinese tariffs. On the positive side, investors focused on strong U.S. economic data that pointed to accelerating growth. The negatives won in the end, as the S&P 500 Index fell 1 percent for the week, after rising during eight of the nine previous trading weeks.1
Weekly Top Themes
1. The August labor report showed a strong jobs market and increasing wage growth. Payroll gains (up 201,000) were ahead of expectations, but , more importantly, the long-awaited acceleration in wages appears to be taking place.2Average hourly earnings increased 0.4 percentfor the month and 2.9 percentyear over year, a new cycle high.2
2. Manufacturing levels are also accelerating. The August ISM Manufacturing Index rose from 58.1 to 61.3, its strongest reading since May 2004.3
3. Improving productivity levels should help continue the economic expansion.Rising capital expenditures appear to be improving productivity, which should help profit margins rise and could help suppress inflation.
4. Near-term recession risks appear quite low. We see no signs of an imminent recession. If anything, we would be more concerned about economic growth overheating and interest rates and bond yields rising.