Economic and Stock Market Commentary for the week of August 21, 2018

Alex Ralicki |

Various factors are influencing market sentiment. When the focus has been on the healthy economy and the mostly upbeat second-quarter earnings performance, stocks have rallied. Conversely, when the attention has turned to tariffs and trade and to other global headwinds (most recently the financial crisis in Turkey), equities generally have weakened. Going forward, we sense that the economy, geopolitics, the next earnings season, and the midterm elections—with their potential policy implications— will affect the ebb and flow of trading. Meanwhile,

The economic underpinnings remain sound as the second half proceeds. To be sure, GDP is unlikely to move ahead with the same breakneck speed it did in the second quarter, when growth topped 4%. Slowing gains in employment, manufacturing, and industrial production, and a flattish factory utilization reading in July now suggest that GDP will rise by a still reassuring, but less imposing, 3%, or so, in the current six months.

There are other things to consider. High-profile issues at present are the suddenly more hopeful trade winds out of China and the economic rifts with Iran and especially Turkey. Then, there are the firestorms closer to home, where investigations and the midterm elections hold the potential to affect trading in the next couple of months.

The focus soon will be on the Federal Reserve. To date, the bank has raised interest rates twice this year. And while inflation hasn’t gathered much speed, there could be enough inherent strength in the economy to justify rate hikes in September and December. True, this prospective monetary tightening may be baked into the market already. However, should the economy press ahead with greater vigor than we now expect, a more aggressive rate stance could be adopted.

For now, the bulls hold the edge, although as recent volatility suggests, their grip has become more tenuous than it was earlier during this historic market advance.

Conclusion: The bull market may well persevere, but further, notable gains could require time and effort. For now, as J.P. Morgan observed more than a century ago, “The market will fluctuate.”