Market Review August 2018

US market pushing record highs, but it’s not all gravy

Once again the US finds its equity market pushing record levels, with the S&P 500 eclipsing 2,900 for the first time ever, and Dow Jones Industrial Average creeping back towards 26,000. Employment levels continue to rise, business investment is booming, and consumers are spending more money, all of which are making for a market environment which many are pleased with.

Still, many investors are waiting to see if this booming economy will find itself in another recession at a point in the near future, much of which has to do with wages. Even though more people are employed than before, they are not seeing any sort of wage growth. David Bell of Stirling University in Scotland and David Blanchflower, former Bank of England member and Dartmouth College professor wrote a paper explaining this current phenomenon. “In the post-recession period underemployment has replaced unemployment as the main indicator of labor market slack,” Bell and Blanchflower write. “Underemployment has not returned to its pre-recession level in many countries, whereas unemployment has.” Many employees in part-time jobs report having a desire for full-time employment which they cannot obtain.

India’s economy booms

In a global market which fears a slowdown in growth, India was a bright spot for the month of August. The country announced at the end of the month its GDP grew a whopping 8.2% in the quarter ending in June 2018. This is a 0.5% increase in growth compared to the previous quarter on the year, and analysts don’t see this growth slowing anytime soon. “Indian GDP growth beat most expectations in [the latest quarter] and is likely to continue expanding rapidly over the coming months,” said India economist Shilan Shah.

Still, India is not without its economic concerns, as the country’s central bank had to raise interest rates twice in three months in an attempt to combat inflation, while the country’s currency, the rupee, fell to a record low against the dollar, driving up prices of almost all imported goods.

Turkish Lira, Argentinian Peso implode

The Turkish Lira continued its further decline, settling at about 1 Lira/$0.15 to end the month, and there is not telling how much further the currency will fall. Confidence in the Turkish economy has fallen to a nine-year low, and the country has been experiencing runaway inflation, as high as 15%, and its currency is continuing its march towards extreme devaluation. The country’s relationship with the United States continues to worsen, as the US increased steel and aluminum tariffs on Turkey after which time the country retaliated with their own tariff increases on automobiles, tobacco, and alcohol.

Distrust in the nation’s government has led many in the country to adopt cryptocurrencies such as Bitcoin, in an attempt to store value outside the control of the national government. A survey by ING International Survey reported 18% of Turkish consumers own cryptocurrency, the highest number reported. Luckily, most believe that the situation in Turkey is not indicative of a systemic problem across the globe, and instead is directly caused by the local government. Francois Savary, chief investment officer at Prime Partners, explains, “People have realized that the Turkish situation is very specific. The mismanagement of the economy for the last few years is quite obvious.”

Over in Argentina, the country’s central bank has increased interest rates to 60%, the highest in the world, in an attempt to stop the dramatic decline of its national currency. Still, this move didn’t stop the peso from falling to its lowest level ever, 39.2 to 1 US Dollar.

Monica de Bolle, senior fellow at the Peterson Institute for International Economics, noted the move to raise rates only made things worse. “I think today’s interest hike announcement will do nothing but leave investors even more jittery. I’m finding it difficult to understand why, after yesterday’s announcement about front-loading more of the IMF funding, the government thought the hike was warranted. Hyperactivity starts to look like desperation.”

 

Oil prices see upward trend, but not expected above $80

As oil prices creep back up in the $70s, there is concern their continued rise will result in a strain on consumer spending in the US. The hike in prices is a result of the pending sanctions on Iran by the US, which will likely result in the country constricting its output, as well as the agreement between the US and Mexico to renegotiate NAFTA.

Still, it isn’t expected oil prices will rise much further. The oil and gas minister of Oman, Mohammed bin Hamad Al Rumhy, noted to CNBC, “I think for the rest of this year we should see stability between $70 and the high 70s (dollars a barrel), or low 70s to high 70s. Because this is the wish of all of us who are cooperating with OPEC to provide the market with enough crude to make sure that the consumers are not impacted and we think that the current price is a fair price.”

 

PepsiCo makes a purchase

In a deal worth a reported $3.2 billion, PepsiCo has acquired Sodastream to beef up its product line in a time of need. Jonathan Smalley, CEO of data analytics firm Yaguara , noted, “Large holding companies like Pepsi are going to have more direct relationships with consumers. The big thing is owning the end-to-end data — even with a company as seemingly small as Sodastream, it’s an opportunity to own that interaction.”

This acquisition should also provide benefits in giving PepsiCo a larger presence in a growing consumer base which is demanding healthier beverage products, as well as the direct-to-consumer approach of Sodastream which has been successful over the past several years.

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