U.S. Stock Market
Technology Shares Lead Benchmarks to New Highs
The major benchmarks recorded solid gains in August, helping all but the narrowly focused Dow Jones Industrial Average reach record highs. The technology-heavy Nasdaq Composite Index performed best, building on its outperformance for the year to date, and the small-cap Russell 2000 Index was also particularly strong. Growth stocks handily outpaced value shares across all market capitalizations. Relatedly, technology shares performed best within the S&P 500 Index, followed by consumer discretionary stocks, while the value-oriented energy and materials segments recorded losses. Volatility remained generally contained and trading volumes were muted, as is typical of late summer.
At mid-month, many media reports noted that the S&P 500 Index had established a record for the longest-running bull market—the length of time since the last decline of 20% or more. Analysts debate whether the bull market that ended with the technology stock crash in 2000 began in 1990 or as early as 1987, however, as the 1990 decline fell just short of 20%. The “dot-com” bull market of the 1990s was also significantly larger in magnitude.
|Dow Jones Industrial Average||2.56%||6.73%|
|S&P 500 Index||3.26||9.94|
|Nasdaq Composite Index||5.71||17.47|
|S&P MidCap 400 Index||3.19||8.68|
|Russell 2000 Index||4.31||14.26|
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended August 31, 2018. The returns include dividends based on data supplied by third-party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only. Frank Russell Company (“Russell”) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Profit Growth Reaches Eight-Year Peak
Stock-specific factors helped drive the market higher in August, as the remaining flow of second-quarter earnings reports confirmed that tax cuts, continued global growth, and other factors were resulting in a surge in profit growth in 2018. Indeed, according to FactSet data, after setting a multiyear record in the first quarter, profit growth for the S&P 500 accelerated a bit, expanding by 25.0% on a year-over-year basis in the second quarter and reaching a new eight-year high. Leading technology and Internet-related companies continued to record some of the best gains, with Apple drawing particular attention at the start of the month as healthy sales growth for its new line of iPhones helped it become the first company in history with a market capitalization exceeding USD $1 trillion.
Strong Labor Market Supports Consumer Spending
The month’s economic data also appeared to boost sentiment. Payroll growth in July slightly missed expectations when it was reported on August 3, but the Labor Department also revised previous months’ gains higher. T. Rowe Price Chief U.S. Economist Alan Levenson noted that employment growth, which averaged 215,000 jobs a month for the year through July, has accelerated from 2017 and is nearly double the pace needed to absorb labor force entrants over the medium term.
The healthy job market supported a rise in the Conference Board’s measure of consumer confidence, which jumped in August to its best level in nearly 18 years. The University of Michigan’s gauge of consumer sentiment declined to its lowest level since the start of the year, however, as Americans grew a bit more concerned about rising inflation and interest rates. Indeed, consumer price inflation continued to run slightly ahead of average hourly wage gains on an annual basis. Nevertheless, Levenson notes that consumer spending fundamentals remain sound. Total wage income—which takes account of the growing workforce and longer average workweeks—is growing at an annualized pace of roughly 5%, while recent strength in the U.S. dollar is holding down import prices.
Mounting Trade Tensions Cause Periodic Setbacks
The uncertain and highly volatile policy environment weighed on sentiment at times and may have restrained the month’s gains. On August 10, stocks pulled back following a tweet from President Donald Trump announcing that the U.S. was doubling tariffs on metal imports from Turkey in retaliation for the country’s imprisonment of American pastor Andrew Brunson. The announcement added to existing downward pressure on the Turkish lira, contributing to a broader fall in emerging markets currencies that periodically weighed on Wall Street and other global markets throughout the month.
Investors worried most about the continued escalation of the trade dispute with China. At the start of the month, Beijing announced that it had prepared a list of USD $60 billion worth of U.S. imports targeted for duties if the Trump administration followed through on its threat to hike tariffs on USD $200 billion of Chinese products. Tensions appeared to ease a bit at mid-month, helping the S&P 500 record its best daily gain for the month after reports surfaced that China was sending a mid-level trade delegation to Washington. The two-day talks ended without any apparent progress, however, and on August 23 both countries began implementing previously announced tariffs on each other’s products. The month ended with a threat from President Trump to apply the proposed USD $200 billion round of tariffs as early as September 6.
Trade discussions between the U.S. and Mexico took a more favorable turn. Stocks had their second-best day for the month on August 27, following news that the two countries had negotiated a new trade deal including revised rules governing the crucial cross-border automotive supply chain. Investors hoped that Canada would soon join a revised (if perhaps renamed) North American Free Trade Agreement, but the month ended without a deal between Canadian and U.S. negotiators.
Impressive Earnings Growth Is Likely to Slow
While tax cuts are partly responsible for the recent jump in U.S. corporate earnings growth, another key factor has been unusually robust topline revenue growth—FactSet estimates that revenues for the S&P 500 grew by 10.1% on a year-over-year basis in the second quarter, the biggest gain since 2011. However, revenue growth is likely to moderate in line with longer-term trends, and the year-over-year impact of tax cuts is set to fade in 2019. Profit margins are also likely to face headwinds from higher interest rates, wages, and input costs. As a result, the members of the T. Rowe Price Asset Allocation Committee caution that earnings growth is likely to slow over the intermediate term.
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