Economic Turmoil in Turkey Rattles Global Markets

U.S. equities slipped for the first time in six weeks, as worries over economic turmoil in Turkey pushed investors to the sidelines. After rising to within a half percent of its January record high on Tuesday, the S&P 500 fell for three straight days to end the week fractionally lower. And after falling to its lowest level since January earlier in the week, the VIX index of implied equity volatility spiked higher. The sudden rise in risk aversion also resulted in a sharp drop in bond yields. The yield on the U.S. ten-year note fell eight basis points to 2.87 percent, after having briefly poked its head above the 3.0 percent threshold the previous week. And after two months of relative stability, the DXY dollar index surged to its highest level of the year. The yield on the German ten-year note fell nine basis points to 0.31 percent. 

Investors Focus on the Strength and Stability of American Companies

U.S. equities rose for the fifth straight week, shrugging off worries over trade, as the S&P 500 index climbed 0.8 percent. Since the start of the third quarter, the index has gained 4.5 percent, led by healthcare, industrials and financials. That was not the case last week, however. With the exception of healthcare, which posted another strong week, last week’s best gainers were real estate, staples and technology, which stabilized after stumbling the previous week. And so far in the quarter, the debate over whether value or growth stocks are more attractive has been replaced by a market in which both value and growth sectors are participating.

Economic Strength Provides a Tailwind for Stocks

In terms of equity performance at the sector level, the third quarter is shaping up to be quite different from the first half. In the first two quarters, consumer discretionary and technology were the best performers by a wide margin. They were joined by telecom and energy in outperforming the S&P 500. So far in the third quarter, industrials, financials and healthcare are the best performers, while consumer discretionary and tech, despite being up, have trailed the overall market.

Investor Enthusiasm Dampened by Trade Worries

U.S. equities hung on to post their third straight weekly gain last week, but just barely. The threat from Washington of an expansion in the trade war to cover virtually the entirety of Chinese imports, along with some direct jawboning of the Federal Reserve, dampened what little enthusiasm there was. The more severe reaction was in the bond market, where the yield on the ten-year Treasury note jumped by five basis points on Friday to end the week at a one month high of 2.89 percent, and the 2-10 year spread widened from 24 to 30 basis points. The dollar also slumped late in the week, giving a temporary reprieve to developing market equities.

Market Conditions Resemble Those of the 1990s: Is History Repeating Itself?


Despite the distraction of the administration’s incipient trade war, U.S. equities have quietly managed to grind higher over the past few weeks. The S&P 500 index climbed 1.5 percent last week for the second week in a row. And since briefly piercing its 200-day moving average on April 2, the index has risen 8.5 percent, and now sits at its highest level since February 1, up 4.8 percent on the year. During the most recent two-week stretch each of the index’s eleven sectors are positive, but it has been the healthcare and technology sectors that have led the way, followed by telecom, consumer discretionary and industrials.