August 23, 2018

Stocks opened lower this morning (Dow -100 pts; SPX -.2%). Most market sectors are sagging, led by industrials, financials and materials. Only utilities, telecom, and some pockets of technology are in the green. The financial news media are blaming “trade tensions” as China-US negotiations continue in Washington. Exchange trade volume is very low, so today’s market action doesn’t necessarily represent any conviction on the part of traders. The dollar is stronger against a basket of foreign currencies after a report showing higher wholesale inflation in Europe. That’s putting some pressure on commodities. Copper is down 1%, gold is down .6%, and WTI crude oil is down .4% to $67.60/barrel. Bonds are trading slightly higher today. The 5-year and 10-year Treasury yields are hovering around 2.71% and 2.82%, respectively.

Geopolitics—and domestic politics—remain a murky haze of uncertainty. Most investors don’t expect Chinese & US negotiators to come to a concrete agreement this week. Why? Because President Trump said he doesn’t “anticipate much” to be resolved. Oh, and also the second round of US tariffs on $16bil of imported Chinese goods went into effect today. On the other hand, according to Bloomberg, Mexico “appears close to an agreement on NAFTA.” That would be nice. But then there’s the issue of President Trump’s new-found legal problems after his attorney plead guilty to tax fraud, unlawful campaign contributions, lying, etc. Michael Cohen also implicated the president in those crimes. That said, David Lebovitz, analyst at JP Morgan, says investors should focus on US economic strength. “Separate the signal from the noise.” And the political situation is just noise. 

OK, here’s the real reason the market is falling today: economic data. CNBC says “New Home Sales Fall to 9-Month Low.” That headline seems a bit dramatic, but it is true that the housing market has decelerated a bit. The annualized rate of new home sales in July fell to 627,000 from about 638,000 in June. The June tally was revised up from the initially reported 631,000 annualized units. The month-to-month numbers shift around regularly and aren’t really to be trusted. So is my headline: New Home Sales Sag But Still Above 2017 Average. 

A number of business activity gauges declined this month. Markit Economics released its manufacturing & services PMI data. Both indexes fell more than expected. The manufacturing index fell back to levels not seen since December. Separately, the Kansas City Federal Reserve’s Manufacturing Activity Index fell to 14 from 23 in the prior month. Taken together, these indexes still suggest businesses are growing, but clearly some momentum has been lost. 

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