While major U.S. equity indices pushed higher in August, investors remain concerned about trade and foreign policy.

The S&P 500, Dow Jones Industrial Average and NASDAQ moved higher for the month of August, along with the Russell 2000. Technical momentum is strong, according to Raymond James Senior Equity Research Analyst Andrew Adams, and all major U.S. equity indices were at or near highs on the back of strong second-quarter earnings and good economic data.

However, investors showed signs of caution toward the end of the month, seemingly concerned about U.S. trade and foreign policy, as tariffs on $200 billion worth of Chinese goods could be imposed in early September, according to Senior Equity Portfolio Analyst Joey Madere. In their trade negotiations, the U.S. and Mexico reached an agreement in principle, but ended without a finalized trade deal. The two countries, along with Canada, will continue to negotiate, with the expectations that a completed deal will be reached by the end of September. As a result, domestic stocks slipped slightly on the news, even as the dollar strengthened. However, the momentary slip wasn’t enough to erase gains from earlier in the month, according to Bloomberg.

“We believe … a trilateral deal will be struck before the end of [September] and that will boost general market sentiment and relieve some of the trade fears,” Mills added.

The U.S. economy was expected to be pushed and pulled by three factors in 2018: fiscal policy, monetary policy and labor market constraints. Judging by the increase in the federal budget deficits, fiscal stimulus now appears to be larger than anticipated, adding to the economy’s momentum for the last few months of the year. The pace of job growth has remained strong, beyond a long-term sustainable pace, as there appears to have been more available slack than earlier thought. Data for early third quarter are consistent with moderately strong growth in the near term, explains Raymond James Chief Economist Scott Brown.

Performance reflects price returns as of 4:30 EDT on August 31, 2018.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

• Early data for the third quarter continued to show moderately strong growth in the overall economy, with consumer price inflation trending at the Federal Reserve’s (the Fed) 2% goal, according to Chief Economist Scott Brown.
• Consumer spending (68% of gross domestic product) appears to be trending at a 2.5% to 3.0% annual rate, following a 2.1% pace in the first half of the year.
• Fiscal stimulus (lower taxes and increased spending) has provided support for the economy in 2018, but has also added significantly to the federal budget deficit, worsening demographic strains ahead (i.e., paying for Social Security and Medicare as the baby-boom generation retires).
• The Fed is very likely to raise short-term interest rates following the September policy meeting, but officials are increasingly aware of the risks of raising rates too fast or too slow. Another rate hike in mid-December appears more likely than not, but that could change depending on the economic data.
• Increased tariffs and retaliatory measures have had a significant impact on some sectors, but little effect on the overall economy. That may change if trade conflicts escalate, Brown notes.

• Economic momentum remains solid, and second-quarter earnings have been stellar with more than half of the S&P 500 reporting, according to Managing Director of Portfolio & Technical Strategy Michael Gibbs and Senior Equity Portfolio Analyst Joey Madere.
• Technology shares suffered a blow as Facebook and Netflix stumbled at the end of the month.
• U.S. oil futures climbed past $70 a barrel for the first time in more than a week as a weaker dollar boosted the appeal of commodities and concerns over global supply disruptions persisted, according to Bloomberg.

Your advisor will continue to watch for legislative updates as well as economic developments. In the meantime, please reach out to him or her if you have any questions.

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