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THIS WEEK'S UPDATE

| July 23, 2018
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On Friday, July 20, stocks lost a small amount of ground after President Trump escalated his threats of increasing tariffs on China. However, strong quarterly earnings reports from several large companies helped provide balance in the markets.  For the week, domestic indexes experienced little movement, as the S&P gained 0.02%, the Dow was up 0.15%, and the NASDAQ dropped 0.07%.  International stocks in the MSCI EAFE had slightly more change, with a 0.63% gain. 
 
What We Learned Last Week
 
•          Corporate earnings rose in the 2nd quarter
As of July 20, 87 S&P 500 companies have released their 2nd quarter data. Of these companies, 83.9% surpassed analysts’ estimated results. In fact, the earnings season is going well enough that analysts have increased their growth projections. They now expect to see companies average 22% earnings growth over the past year, up from 20.7% growth projections on July 1.  This is great news, but keep in mind this sets the bar pretty high a year from now.  Wall Street doesn’t like it when year over year earnings decline.  This is not a prediction, but rather just something worth filing away.
 
•          Retail sales increased
The most recent retail sales data indicated that consumers feel confident in the economy and labor market. June’s strong growth, coupled with upward revisions to May’s results, support predictions for healthy Gross Domestic Product (GDP) increases in the 2nd quarter.  
 
•          Industrial production hit a new record 
In June, U.S. manufacturing and mining increased. Overall, industrial production had an annual rate that was 6.1% higher in the 2nd quarter than the 1st quarter of 2018.  
 
•          Housing starts dropped 
The latest housing-start report came in far below estimates. This decline occurred across all U.S. regions as homebuilders shared concerns about materials costs and labor shortages. However, housing start data often fluctuates from month-to-month, and reports show that the 1st half of 2018 is 7.4% higher than the same time period last year.   

A brief word on tariffs and trade barriers
I wrote a little bit about Tariffs and their unintended consequences in the quarterly letter we mailed out in early July.   However, I've had a few questions about how they might affect the economy.  I am not an economist but there could be benefits coupled with several risks.  The potential benefits of tariffs are the possible fostering of growth in specific industries here in the U.S., protection of national security interests, benefits for certain producers and jobs within their industries, sources of revenue for the government and directly addressing international trade distortions. Potential risks could include a slow down of economic growth, increase prices and stimulate inflation, hurt consumers as higher prices are passed on, loss of jogs in downstream industries and harm domestic exporters.  One would hope cooler heads would prevail and better terms would be negotiated for all sides.  However, as I mentioned in the quarterly letter no one really knows what the unintended consequences will be.  All in all, tariffs become a tax on the consumer as higher prices are passed along.  
 
What's Ahead This Week?
Corporate earnings season continues, and on Friday, we’ll receive the initial reading of 2nd quarter GDP. Last week’s retail sales and industrial production numbers contribute to very high expectations for economic growth results. Some estimates indicate that GDP could have increased as much as 5.2% in the 2nd quarter—much higher than the 2% growth between January and March.   Two thirds of the FAANG stocks I wrote about a few weeks back announce earnings this week.  Google reports tomorrow, Facebook on Wednesday and Amazon on Friday.  For a little more perspective on the girth of these 5 companies I came across a great graphic.  The market capitalization (or overall value) of the top five S&P 500 companies is $4.1 trillion, with a T.  The market capitalization of the bottom 282 companies in the S&P 500 is also $4.1 trillion.  You can see the comparison below.  Pretty incredible. 




These along with other big names like AT&T, Exxon Mobil, Intel, Coca-Cola, McDonald’s, Starbucks and the President’s ever favorite Twitter are among a multitude of earnings reports this week. By Friday, we should have a pretty good handle on how American business is doing.
 
We will watch these results closely and look for additional perspectives on the economy’s underlying strength. If you’d like to know more about what may lie ahead, contact us any time. 
 
Economic Calendar:
Monday: Existing Home Sales
Wednesday: New Home Sales
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, Consumer Sentiment
 
This week in history:
On July 23, 1996, at the Summer Olympics in Atlanta, Georgia, the U.S. women’s gymnastics team wins its first-ever team gold.
 
Quote of the week:
“It takes as much energy to wish as it does to plan.”
 — Eleanor Roosevelt

PUBLISHED BY NICK TOADVINE

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