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Aug 01 2018

8/1/18 Market Notes

July ended on a positive note as all major stock averages ended the day and the month higher. The
S&P 500 gained ½% on Tuesday, ending the month over 4% higher as late month trade jitters and
mixed earnings reports increased downside volatility in the past week and a half. Oil prices declined
7.8% in July, as added supply and demand concerns drove prices lower. Treasury yields and the U.S.
dollar, while exhibiting greater than normal volatility essentially ended where they began.

On the economic front, data has mostly been in line with expectations, as major consumer inflation
gauges remain benign during this robust growth environment. Recent data has pointed to an uptick in
inflation, with the Employment Cost Index rising 2.8% year-over-year, the greatest increase in a
decade. The cloud hanging over the market is the threat of a trade war between the United States and
its trade counterparties. Tuesday and this morning’s market action are a typical illustration of the
uncertainty and whimsical nature to trade in the current environment. After spending most of the day
near the flat line, stocks rose sharply in the mid-afternoon as reports surfaced that Shino-America
trade talks had resumed. Industrial shares such as Caterpillar (CAT) and 3M (MMM) rose sharply,
propelling the tariff sensitive sector 2.12% higher for the day. This morning, however, those gains are
seen as reversing as major equity index futures are pointing to a lower open after the White House
indicated that the Trump Administration is contemplating adding a 25% tariff on over $200 billion
worth of Chinese goods.

International and U.S. bond yields fell yesterday after The Bank of Japan surprised market
participants in announcing it is not planning to materially change its monetary policy measures,
instead opting for continued negative rates. The move underscores the continued divergence in
economic performance and accompanying interest rate policy. Most expect the U.S. Federal Reserve
to raise interest rates twice more this year, and possibly as much as three times in 2019, likely putting
out benchmark rate near 3 ½% by the turn of the decade. By comparison, Japanese and European
yields are virtually certain to remain below 1%, most likely leading to a continued weaker than
‘normal’ Euro and Yen, thereby offsetting a significant portion of the impact of trade tariffs.


The GGFS Investment Committee

Jul 31 2018

7/31/18 Market Notes

The sell-off in technology stocks continued on Monday, dragging broader markets down as seven of
the eleven sectors of the S&P declined. The Dow Jones Industrial Average lost 144 points, while the
S&P lost a similar 0.58%. Technology shares lost 1.78% as a sector, while telecom shares rose 1.95%
as a group.

On the economic front, pending home sales rose 1/3rd as much as forecast, disappointing investors
ahead of today’s inflation, consumer spending and home price data. Oil prices ended the day above
$70 per barrel (WTI), while gold prices continued to slip and U.S. Treasury yields rose mildly ahead
of tomorrow’s FOMC meeting minute release.

While earnings season has been very strong, several prominent corporate chieftains have expressed
concerns over the direction of trade policy and the impact it is having on their businesses. Yesterday
The Coca Cola Company (KO) was the latest to warn that newly imposed tariffs are creating profit
pressures and that the company would pass through some of these increases in form of price hikes.
Premarket equity futures are pointing to a mixed open this morning, ahead of earnings from Pfizer
(PFE), Proctor & Gamble (PG) and Apple (AAPL). The latter is the fourth of the so-called FANG
stocks to report, two of which have sharply disappointed investors.

The Treasury is contemplating further tax cuts, which would almost exclusively benefit the wealthiest
Americans. The proposal is being met with resistance from Democrats as well as some Republicans
who are voicing concern over the projected $1 trillion plus budget deficit for next year. Separately,
President Trump has threatened to ‘shut-down’ the government if Congress doesn’t approve funding
for “his” boarder wall; Senate Majority Leader Mitch McConnell stated that he has no plans or
intentions to shut-down the government over boarder wall funding. The statements by President
Trump are seen to further complicate NAFTA negotiations with the newly elected leftist President of


The GGFS Investment Committee

Jul 30 2018

7/30/18 Market Notes

Facebook (FB) wiped over $119 billion off its market cap last week, after releasing slightly
disappointing earnings results. Much like Netflix the week prior, North American subscriber growth
was the biggest culprit within the data. With three of the four FANG stocks having reported already,
all eyes will be on Tuesday’s earnings release by Apple (APPL). The company is expected to report
earnings of $2.17 per share on $52.37 billion of revenue. Looking beyond the report, investors will be
keen to hear about foreign earnings repatriation, and changes to the company’s dividend policy, as
well as how the current trade war between China and the United States may be impacting its supply

Brexit, the Bank of Japan monetary policy meeting, President Trump’s meeting with the Italian Prime
Minister, and the ECB meeting are all part of a very full agenda this week. While the voluminous
calendar of events could spark some additional volatility, investors are more likely to ignore
geopolitics this week and focus on corporate earnings as well as some key domestic data, particularly
housing related data.

In spite of recent volatility and a general feeling of unease, the S&P 500 is up about 5 ½% so far this
year, while the small-cap stocks as represented by the Russell 2000 index are up over 8% year to date.
In other words, markets are up nicely just past the half way mark of the year, in particular when
considering that the fourth quarter tends to be one of the strongest performers for equity investors.
However, escalating trade tensions between the United States and the rest of the world could derail
both markets and our economy. Following last week’s successful meeting between President Trump
and European Union President Jean-Claude Juncker, and reports of progress in renegotiating NAFRA,
market participants will likely want to get some details and follow through; or at the very least avoid
new harsh rhetoric.

Asian, European and pre-market U.S. equity future are all lower this morning, as investors wait for
key data releases. Oil prices are near $70 per barrel, as WTI is trading at $69.59 this morning on the
back of a strengthening U.S. dollar. Treasury yields are up slightly, as the benchmark 10 year yield
encroaches on the psychologically important 3% level.


The GGFS Investment Committee

Jul 27 2018

7/27/18 Market Notes

In spite of a very visible and painful earnings miss by Facebook (FB) that sent the NASDAQ more
than 1% lower on Thursday, the overall earnings picture appears to remain intact. Intel (INTC),
Starbucks (SBUX) and Amazon (AMZN) all handily beat earnings expectations after the closing bell
rang on Thursday, and overall nearly 80% of the companies that have reported earnings so far have
exceeded expectations (according to FactSet).

The Dow Jones Industrial Average gained more than 100 points or nearly ½% while the S&P 500 fell
0.3%. Driven by Facebook’s near 20% decline for the day, the technology sector lost 1.64%, while the
utilities sector gained 1.14% as seven of the eleven sectors of the S&P gained ground.

On the economic front, the June Durable Goods Orders report fell significantly short of expectations,
showing a 1% rise in orders versus an expected rise of 3%. May orders were revised up slightly, but
remain negative. As many expected, transportation equipment orders (airplanes) led the way as the
fear of additional tariffs front-loaded orders.

U.S. GDP grew by 4.1% in the second quarter, slightly ahead of the Atlanta Fed’s 3.8% estimate but
below the consensus estimate of 4.4%. First quarter GDP was revised upward to 2.2%, as strong
government spending and robust consumer spending helped boost the expansion (corporate
expenditures were below forecast). Treasury yields and the U.S. dollar are slightly lower on the news.
While oil prices have risen more than 15% year-to-date, the increase has not fueled energy company
earnings as much as expected. Both Exxon Mobil (XOM) and Chevron (CVX) reported disappointing
results this morning, missing both top and bottom line estimates. Oil priced ended the day up 31 cents
(about ½%) to $69.61, and are down slightly in early morning trading.


The GGFS Investment Committee

Jul 26 2018

7/26/18 Market Notes

There was little action in stocks on Wednesday, until about 3:30 PM after the White House announced
that President Trump had received concessions from EU President Jean-Claude Juncker. The S&P
jumped nearly 1% on the news, as a mixed market turned decisively positive with 10 of the 11 sectors
of the S&P ending higher. Telecom shares where in negative territory, holding back the Dow Jones’
performance as Verizon (VZ) slipped 1.16% and AT&T (T) fell 4.50% for the day. After the closing
bell rang, a spokesperson for the European Union stated that neither the EU nor Mr. Juncker made
concessions or guarantees other than to agree to hold off on implementing new tariffs and considering
importing more U.S. soybeans as negotiations continue.

Several widely held stocks reported earnings after the bell, none more dramatically than Facebook
(FB) whose results disappointed investors, sending shares as much as 25% lower in afterhours trading.
Facebook shares are set to open about 15% or 35 points below yesterdays close. Facebook’s
disappointing earnings report is placing additional scrutiny on the other FANG stocks, after a
somewhat disappointing report by Netflix (NFLX) last week. Amazon (AMZN) is set to report Q2
earnings later today. The tech heavy NASDAQ is set to open sharply lower this Thursday morning.
On the economic front, market participants will digest the 8:30 AM release of June Durable Goods
Orders, which are expected to have risen 3.7%. The report will provide insights into economic activity
ahead of Friday’s highly anticipated release of second quarter GDP data. Many analysts believe that
Q2 GDP may have benefited from a short-term increase in economic activity as a preamble to the
newly imposed tariffs and counter-tariffs.

Oil prices are continuing to eke higher as tensions between Iran and the United States persist, while
the U.S. dollar is trading relatively flat against major currencies. Treasury yields are mildly higher this
morning, ahead of today’s ECB meeting and tomorrow’s GDP data release.


The GGFS Investment Committee

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