Highlights
• Stock prices rose on solid economic data and expectations that trade issues should ease.
• We see downside risks coming from rising protectionism and economic weakness outside the United States, but expect stock prices to overcome these headwinds.
Global equity markets improved last week, thanks to solid economic data and signs that at least some areas of trade policy could be improving. Softer inflation data also helped, as it tamped down worries about an overly aggressive Federal Reserve. The S&P 500 Index rose 1.2 percent for the week, with the telecommunications, energy, technology, industrials, consumer discretionary and health care sectors all rising more than 1 percent.1 The U.S. dollar declined last week, which boosted the beleaguered emerging markets.1
Weekly Top Themes
1. Inflation is unlikely to move significantly higher. August data showed the core Consumer Price Index grew only 0.1 percent for the month, causing the year-over-year reading to slip from 2.4 percent to 2.2 percent.2 At the same time, annualized headline inflation fell from 2.9 percent to 2.7 percent.2 We believe price increases will remain contained, as inflation surveys show price pressures relatively modest and wages rising slowly.
2. Strong consumer sentiment suggests the economic expansion continues to have legs. The August University of Michigan’s Consumer Price Index jumped to its second-highest level since 2004.3 Sentiment improved across all income groups, with Americans as a whole expecting more jobs growth and better wages.3 The only notable negative was that consumers are growing increasingly concerned about rising trade tariffs.3 We believe modest wage improvements and relatively contained inflation will boost the consumer sector.
3. We expect jobs growth to continue. With the labor market tightening, we believe wage levels should continue to slowly improve, which should put additional pressure on the Fed to raise rates.
4. The next boost for equities will probably require easing trade tensions and improving global economic growth. Rising earnings have provided a strong tailwind for stock prices this year, but earnings are likely to moderate over the next 12 months.
5. The midterm elections are not likely to significantly affect the direction of the stock market. President Trump has taken a hard line toward trade issues and international relations in general. We do not expect that to change based on the outcome of the midterms, and doubt Democrats will be able to exert much influence over these matters even if they gain a majority in the House of Representatives. The good news could be that history suggests stocks may be poised for an increase regardless: The S&P 500 Index has not fallen in the 12 months following a midterm since 1946.4