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Aug 15 2018

8/15/18 Market Notes

Slightly better than expected inflation data in form of flat import prices along with an absence of new
geopolitical drama were enough to lift equity markets by about ½% as the Dow Jones Industrial
Average rose more than 100 points and the NASDAQ gained 0.66%. The move underscores the
bullish sentiment most investors have as unemployment continues to move towards record lows and
corporate earnings rise by roughly 20% year-over-year. However, market leadership continues to be
very narrow, with a handful of stocks accounting for virtually all of the gains of the S&P. The sharp
performance divergence is raising concerns amongst many professional money managers as it
reinforces the idiom ‘diversification, always having to say “I’m sorry”’; as it essentially means that
diversification and other risk mitigating strategies have caused portfolios to underperform indexes.

On the international front, international bourses are mostly lower this morning, as the Shanghai index
is off by more than 2%, setting the stage for a lower U.S. stock market open where pre-market futures
are indicating a near double digit drop at 6:00 AM EST. Trade tensions are once again escalating, as
Turkey’s government announced new tariffs on U.S goods, including tobacco, alcohol, and

In reaction to the growing international trade tensions and minimal inflation pressures U.S. Treasury
Yields are dropping once again, as the benchmark Ten Year yield remains below 2.9%. The pressure
on longer-term rates coupled with the expectation that the Federal Reserve will most likely raise rates
at least once more, probably twice more this year, is flattening the yield curve and pushing the U.S.
dollar higher. The rising dollar is putting some earnings pressure on U.S. based multinationals, all the
while providing some relief to tariff stricken foreign companies.

Commodities continue to soften, as oil prices are down by more than 1% overnight, now having
reversed most of its recent rally. Rising U.S. reserves as well as a weaker global growth outlook are
being cited as the principal reason for the recent rout.



The GGFS Investment Committee

Aug 14 2018

8/14/18 Market Notes

In what is becoming a familiar pattern, stocks sold off on Monday as there was a lack of economic
data or earnings reports to push markets higher. Instead, investors were forced to focus on geopolitical
events, including the rising debt and currency crisis in Turkey. While the crisis may remind some of
the 2008 – 2012 Greek debt crisis, Turkey’s woes are very different. Most strikingly, the debt is
mostly privately held corporate debt, making a bailout less likely. Additionally, the currency pressures
are occurring in part due to economic concerns relating to recently enacted tariffs on steel and other
exports to the United States. After attempting to regain some ground, the Dow Jones Industrial
Average ended ½% lower for the day, as bond yield were mixed and the U.S. dollar continued to rally
against the Euro and Yen.

Healthcare and Utilities were the two only S&P sectors that ended in positive territory, as energy,
materials and financial shares all fell by more than 1% for the day. Merck (MRK) and Apple (AAPL)
led the Dow gainers, while DowDuPont (DWDP), Goldman Sachs (GS) and JP Morgan (JPM) led
Dow losers.

The Small Business Optimism index showed that most business owners remain upbeat about the
economy and growth prospect. Later in the morning market participants will receive the latest
inflation data in form of Import Price Index, as well as Household debt levels.
As the international tariff battle continues, China has announced it would not purposely devalue to
Renminbi (Yuan) as a weapon against tariffs. While it is true that the Chinese currency has dropped in
recent weeks, the reason behind the drop is most likely the fact that China’s Central Bank has begun
an easing of Monetary Policy process, something that had been telegraphed months ago, while the
U.S. Federal Reserve continues to move towards tighter policy, raising rates and lessening
reinvestments of maturing bonds principal. While having garnered little attention in recent years, the
August 23 – 25 Jackson Hole Summit may carry additional importance this year, as central bankers
will likely address tariffs and trade wars, NAFTA renegotiations, and diverging Monetary Policies
amongst the world’s leading Central Banks.

The GGFS Investment Committee

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

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