06|05|2018

Course Correction | June 1, 2018

The S&P 500 gained 13.29 points, or 0.5% last week. Was this a course correction, or a false positive?

There were several points during the week where the expectation was that the correction was continuing:

Europe caused concerns early on as the government formed in Italy could prompt ‘Italeave’ and the Prime Minister of Spain was ousted. These anti-EU moves caused concerns in EU stability across the week.

President Trump compounded EU concerns on Thursday as he announced that he was going to allow exemptions for the EU, Canada and Mexico to expire on June 1st that would enact tariffs globally. That weighed not only on the EU, but NAFTA negotiations with Mexico and Canada.

All that said, markets managed to push ahead. Much of the progress seems due to the Jobs data released across the second half of the week. Unemployment fell to 3.8% in April, its lowest level since April of 2000. 223K jobs were added and wages increased 2.7% year over year. The market response to the data was positive as they seemed to focus more on the 3.8% and 223K jobs added. While the rate fell to 3.8%, the participation rate also fell .1%. More concerning should be the continued strength in wage growth; It is a predictor of future inflation.

Global headwinds are mounting, but the current economic environment is still strong. ISM Manufacturing data strengthened. Second quarter GDP may be the highlight of the year, which will yield a good Q3 market performance, however it may be the calm before the storm in 2019.

 

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