Market Review June 2018

Riding the stock market roller coaster

Stock prices rode a wave of ups and downs during the month of June. The Dow Jones Industrial Average topped 25,300 mid-month, only to tumble down towards 24,100 before month’s end, an almost 5% swing in just a single month. During the same period the Nasdaq rose to its peak for the year above 7,780 before also retreating about 4% to around 7,445.

This wave of price fluctuation sent the CBOE Volatility Index above 18, but was still not nearly as volatile as the beginning of the year which saw the index close to 30. This points to possible stability in the market, even during this time of economic and political uncertainty.

Retaliatory tariffs to affect US economy

Something weighing on markets towards the end of the month was announcements from Canada, Mexico and the European Union of possible retaliatory tariffs against the United States in response to sanctions President Donald Trump has levied in order to protect jobs in his country.

The European Union is reportedly mulling tariffs on US automakers to the tune of $300 billion as noted in a letter to the US Department of Commerce, in response to tariffs by the US on European cars. Meanwhile, Canada has already taken measures against the US with $12.6 billion in tariffs which Canada’s foreign minister claimed, “We will not escalate, and we will not back down,” according to Foreign Minister Chrystia Freeland. This will affect imports of products such as yogurt, caffeinated roasted coffee, toilet paper, and sleeping bags into Canada. Mexico has also joined the party to levy tariffs against their neighbors to the north, as on June 5th tariffs went into effect against US imported pork, cheese, cranberries, whiskey and apples.

Record employment growth

The US economy showed signs of slowing as the unemployment rate rose from 3.8% to 4.0% in June, with 213,000 jobs being added during the month as reported by the Labor Department. The uptick in unemployment is said to be a result of citizens who had previously given up on finding employment once again looking for jobs. Still, the economy has added jobs for the 93rd straight month, a record streak for employment growth even as executives say they are unable to get qualified workers for positions needed.

Even in this low unemployment economy, wages have yet to increase as much as the average American would like, with average hourly earnings at 2.7% higher than a year ago, which doesn’t nearly match the 3.5% wage growth in past healthy economies. “It’s not your father’s labor market anymore,” said Diane Swonk, chief economist at Grant Thornton. “Clearly there are some sectors like trucking where wages are going up, but warehousing wages really collapsed and are only now just $12 or $13 an hour.”

However, many are worried about how President Trump is handling trade could impact employment down the road. “People are worried. The trade war isn’t hurting them yet, but they are concerned. We can take a little bit of a trade skirmish, but not a full-blow trade war,” said Swonk. “If this doesn’t stop, manufacturing will take a hit.”

 

A kickstart to the  manufacturing sector, or too much of a bailout?

Domestic investment in the US economy continues to build higher in the Trump-led administration. Foxconn, the world’s largest contract electronics manufacturer, and key supplier to Apple, broke ground on a new $10 billion LCD manufacturing complex which is expected to bring 13,000 jobs to Mount Pleasant Wisconsin, a key state in the President’s victory in the 2016 election. “Foxconn will serve as a magnet for talent,” said Jenny Trick, director of the Racine County Economic Development Corporation, which beat nearby Kenosha county in bidding for the deal. The plan is already underway, with $100 million worth of construction contracts awarded, which could lead to as many as 16,000 temporary jobs before the facility is even completed.

However, this move is not being supported by everyone, as detractors believe too much money was subsidized by the state of Wisconsin to make this deal possible. Additionally, a small number of landowners are refusing to sell their properties to make way for the new factory. Not to mention the fact that Foxconn previously promised to build a $30 million factory in Pennsylvania years ago which never came to fruition.

 

Is China in a bear market?

The aforementioned trade policies which are affecting the United States are also playing a role in the downswing in equities markets in China. The Shanghai composite fell 8% over the month of June, making it down 13.9% already on the year, on pace for its worst performance since 2011. This comes as the country works to reduce its growing level of debt.

The country’s government is pulling the reins in on monetary policy to support economic growth. This can be seen in the action taken by The People’s Bank of China to lower its reserve requirement ratio for banks hoping in an effort to allow businesses to more easily get funding an obtain liquidity.

To date the global markets have yet to follow suit with China, so says Sean Darby, chief global equity strategist at Jefferies. “Based on history, things are probably slowing down in China now,” he said. “So far the international markets have not picked up this slowdown at all.”

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