GGFS Commentary

Stocks set another record high on Wednesday as technology shares and the NSDAQ gained nearly 1% as 8 of the 11 sectors of the S&P ended up. Investors were encouraged by the second reading of Q2 GDP, which showed the U.S. economy had grown by 4.2%, its strongest pace in 4 years. Gains were suppressed by a disappointing Pending Home Sales report, which showed activity falling for a seventh month in a row, declining 2.7% from a year ago. While the figure may seem small, the decline is meaningful and is seen by some as an indicator of broader issues to come.

Overnight, international bourses gained ground, following the U.S.’s footsteps, as the U.S. dollar strengthened slightly causing oil prices to appreciate as well. Treasury yields remained relatively flat, as market participants for today’s Income & Spending data and more importantly the latest inflation data, which might sway the Fed in their policy direction.

U.S. equity futures are pointing to a lower open this Thursday morning, on what is most likely profit taking, although some are citing stressed trade negotiations as the catalyst. Earlier this week the United States and Mexico announced an agreement for a new trade deal that would replace NAFTA And late yesterday, Canada “agreed” to rejoin the talks after White House Economic Advisor Larry Kudlow stated that Canada may face auto tariffs if it did not agree to a “fair deal.” Although continuing negotiations, neither China nor Europe appear close to an accord with the United States. To Wit: Early this morning China’s commerce ministry said that the current trade negotiations can only proceed and be successful if both nations approach and recognize each other as equals, adding (according to Reuters) “China will stick to the steady opening of its economy regardless of U.S. actions.”

Sincerely,
The GGFS Investment Committee

Easing trade tension and an 18 year high August consumer confidence figure helped push stocks higher for most of the day, with the S&P 500 crossing the 2,900 line for the first time before retreating and closing near the flat line. Walmart (WMT) rose 1.62% helping to lift the Dow Jones Industrial Average higher as 22 of the 30 components ended in negative territory. The Tech heavy NASDAQ also ended at an all-time high as Apple (AAPL) rose 0.81% and Netflix (NFLX) gained 1.07%.

Treasury Secretary Mnuchin praised China’s efforts to support its currency, decisively (ironically) pointing out that such a move to support the currency is not manipulation. None-the-less, the U.S. dollar generally weakened against major currencies as the appetite for risk assets returned to the market. Oil prices spent most of the day in positive territory, before shedding gains to end slightly lower as dollar weakness pressured the commodity. U.S. Treasury yields ended mildly higher, as the benchmark Ten Year Yield closed at 2.88%.

Both investor optimism and consumer confidence are currently at a multiyear high, begging the question “what next”. As the U.S. and global economy continues to thrive and business expansion is set to continue for the next couple of quarters at least, investors have every reason to be optimistic. However, as the narrow market leadership suggest, simply buying an index or being indiscriminant in one’s investment approach could lead to expensive consequences. Focusing on balance sheet strength, diversity of revenue streams and earnings quality are paramount in a fully valued investment environment.

Economic data is likely to dominate investor behavior on Wednesday, as the first revision to second quarter GDP is due. A CNBC / WSJ poll concludes that the consensus expectation for Q2 GDP growth remains at +4.1%, unchanged from its initial reading. Historically, it is not uncommon for the first revision to come in slightly lower than the original reading, with the third reading (which will occur in September) generally benefiting from an upward revision. As markets enter September, which is historically one of the most challenging months for equities, a strong GDP reading could be crucial to keep the ten year old bull market running.

Sincerely,
The GGFS Investment Committee

Word of a trade deal between the United States and Mexico propelled stocks higher, as the NASDAQ crossed the 8,000 level for the first time in history, the Dow Jones Industrial Average gained 1% and the S&P 500 closed at a record high. The Utilities and Real Estate sectors failed to participate in the rally, ending lower for the day, while Material and Financial shares gained the most for the day. This morning (Tuesday) equity futures are pointing to a mixed to slightly higher open as market participants wait for details of the announced trade agreement, which is said to be valid for 16 years.

On the economic front, the Chicago National Activity Index registered much lower than forecast, rising 0.13% in July, although it is important to note that this index can be volatile and irregular. Today’s Consumer Confidence, Case Shiller Home Price Index and Advanced Trade in Goods reports will provide a better picture of the state of the economy. European and Asian bourses are mostly higher overnight, as the positive U.S. market momentum is driving sentiment there.

The newly announced trade deal with Mexico is having little impact on Treasury yields or the U.S. dollar, both of which remain steady. Oil prices, however, are continuing their upward climb with WTI being within striking distance of $70 per barrel and Brent Crude trading above $76 per barrel. Economists are expressing some concern that the higher oil prices coupled with rising prices due to tariffs could have a significant slow-down effect on the U.S. economy later this year.

On the international front, the announced trade deal between the U.S. and Mexico is putting significant pressure on China and Europe, as it demonstrates that major trade counterparties are prepared to ‘go it alone’ to strike a deal. This is particularly problematic for Europe, which is at the cusp of a new crisis as a result of the Italian sovereign debt crisis and the Turkish debt and currency crisis.

Sincerely,
The GGFS Investment Committee

Stocks appear set to continue were they left off on Friday, as major international bourses are all
rallying and premarket U.S. equity futures are pointing to a higher open. Mexican and U.S. trade
officials both cited meaningful progress in trade negotiations over the weekend, going as far as
indicating that a ‘major trade deal’ could be reached this week. Furthermore, the People’s Bank of
China announced over the weekend that it would change how it manages the Yuan’s valuation, in
essence indicating that it does not desire to use the currency as a tool to counter the impact of tariffs.

 
While Fed Chairman Jerome Powell remained upbeat in his view of the U.S. economy, some of his
Fed colleagues struck a slightly more cautious tone while at the Jackson Hole Summit last week. Most
notably St. Louis Fed President James Bullard stated in a CNBC interview that he would not raise
rates further at this time, referencing data and comments from Atlanta Federal Reserve President
Raphael Bostic. Mr. Bostic continues to raise concerns over the impact of tariffs and the national
budget deficit, which is almost certain to exceed $1 trillion next year. Mr. Bostic and Mr. Bullard both
point out that the rising deficit is a material contributing factor to our nation’s trade deficit, and that
tariffs will impact consumers to a greater extent than many believe. In a Financial Times interview,
Mr. Bostic said “we are at an inflection point (of the U.S. economy) almost in terms of having this
trade policy really start to affect what consumers see and experience in stores.”

 
Oil prices remain elevated as new sanctions on Iran and trade spats continue to impact the supply
chain. The U.S. dollar is reversing some of its strong gains from last week, as U.S. Treasury yields are
mostly lower after Mr. Powell’s Jackson Hole speech. Commodities in general remain weak, as
Copper sits near its lowest point since late 2016, a potential indication that global demand isn’t as
robust as the headline data suggests.

 
Trade, currencies and emerging market debt crisis are all at the forefront of investor’s minds this
week, making Wednesday’s second look at Q2 GDP data potentially more critical. Consensus
estimates are that the U.S. economy grew by 4.1% in the second quarter, which could keep it on track
to grow by 3% or more for the year.

Sincerely,

The GGFS Investment Committee

Markets were mostly lower, albeit only slightly, as investors grew increasingly nervous about the
effects of a trade war with China. The renewed concerns came after the latest Fed minutes showed
that members of the Federal Open Market Committee (FOMC) are concerned about the impact of
tariffs and the Fed’s readiness and ability to act when the next recession occurs. Although the S&P
500 only ended 0.17% lower, 10 of the 11 sectors of the index were down with technology being the
only bright spot. The economically sensitive sectors such as Materials, Energy and Industrials led the
market lower, while consumer staples and discretionary shares fell by about ¼%.

 
European and Asian bourses are higher overnight, as are U.S. equity futures as investors wait to
formal comments by Fed Chairman Powell. Observers will be particularly focused on any references
to tariffs and their historical impact on economies, in particular after trade talks between China and
the United States ended yesterday with virtually no progress at all. The Chief Executive Office of The
American Apparel and Footwear Association said in an interview “We’re watching the Titanic sail out
of port here; this is not a good thing”, in response to the level of concern he and the apparel industry
have over the situation.

 
Oil prices are up nearly 2% as new sanctions against Iran take effect, causing traders to worry about
tighter supplies. The U.S. dollar and Treasury prices are also lower this morning, ahead of the second
day of the Jackson Hole summit.

 
On the economic front, New Home sales fell to a nine month low, as a shortage of supply, rising
interest rates and a dip in consumer confidence dominated sentiment in July. This morning’s Durable
Goods order report showed a decline in orders of 1.7%, greater than the 0.5% expected decline. A dip
in aircraft orders is being cited as the main reason for the greater than forecast drop.

Sincerely,

The GGFS Investment Committee