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Widening of gap between domestic and international performance

SEP. 04, 2018
  • Equity markets rallied for the eighth time in nine weeks, with encouraging economic data and progress on the trade front driving markets to an all-time high. August ended with a 3% return for the S&P 500 Index (fifth-straight positive month), with a 10% return year-to-date. The calendar now turns to September, which historically has been the worst month of the year (particularly during midterm election years); the only month that is down more often than up.
  • Data this week gave a positive view of the economy. Second-quarter GDP was revised higher to 4.2%, the best level of growth in nearly four years, with revisions boosted by business spending. Consumer confidence jumped to 133.4 in August, up from 127.9 in July, well ahead of expectations and at the highest level since 2000. Consumer spending and income were both in line with expectations, rising 5.2% and 4.7%, respectively, versus a year ago. There is a wide range of estimates for third quarter growth, with positive trends in consumer and business spending, offset by slowing job growth and weak housing data. The Atlanta Fed’s GDPNow quantitative model projects 4.1%, much higher than the consensus estimate of 3.0%.
  • European economic data continues to disappoint, with eurozone economic sentiment data down for the eighth consecutive month, driven by trade worries on trade tensions and the threat of auto tariffs. The headline business climate indicator fell to 1.22, down from 1.29 last month. Views on the current order book, inventories and export orders all weakened. Brexit optimism improved, with French President Macron saying he wants E.U. leaders to agree to a close relationship with Britain as part of his vision for a unified Europe, targeting the September 20 summit to detail the new structure. Earlier this week, the U.K. and E.U. agreed to push back the hard deadline for a deal until mid-November.


This is an important week for trade, following progress last week in negotiations with Mexico. Following a failure to secure an agreement with Canada on Friday, the U.S. and Canadian trade representatives resume talks on Wednesday. We are likely to get details on further tariffs on China this week, with negotiations not expected until the end of the month. Domestic investors have largely shrugged on trade worries, with the S&P 500 returning 8% since the beginning of March, when tensions accelerated.

Emerging Markets

Several headwinds have impacted emerging markets, which have returned -11% over the past six months (underperforming the S&P 500 by 19%), including trade tensions, a rising dollar and country-specific risks. Budgetary and geopolitical risks have arisen in Turkey and Argentina, causing dramatic weakness in their currencies, down 50% this year versus the dollar. Argentina is responding with higher interest rates (up 15% to 60%) and a fresh round of austerity measures. If trade tensions ease, broad EM indexes should rally, as the idiosyncratic risk is limited to a narrow group of countries.


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