This past week, the S&P 500 and the Dow Jones Industrial Average (DJIA) both reached record highs.
The S&P 500 had already been hitting higher highs in recent weeks, but this is the first time since January that the Dow Jones Industrial Average fully recovered from this year’s losses and touched a new record as well:
The Dow Jones Industrial Average tracks 30 of the most blue-chip companies in America, compared to the S&P 500 which tracks 500 companies. Most or all Dow Jones Industrial Average companies are also in the S&P 500 (and thus in the C Fund), but overall the index has less technology exposure.
After this summer when international stocks majorly underperformed U.S. stocks, we’ve seen a bit of a comeback in recent weeks.
Over the last two weeks, emerging markets gained about 5% and developed international markets (including the I Fund) gained about 4% from their lows. International stocks have still been major under-performers this year but at least so far it seems like the recent sell-off may be stabilizing.
The Turkish lira and the Argentine peso seem to have stabilized for now, and the U.S. dollar has relaxed its recent strength. The currency weakness in some of these smaller countries is what triggered part of this summer’s international sell-off.
Trade Dispute Updates
Earlier this year, after imposing taxes on steel and aluminum imports, the United States put 25% tariffs on $50 billion worth of Chinese exports to the United States. China responded by putting tariffs on $50 billion worth of American exports to China.
In addition, China’s currency weakened from 6.3 yuan-to-USD to 6.8 yuan-to-USD, which some analysts think may be intentional from China to offset the tariff impact. A weaker yuan effectively means it’s cheaper for Americans to buy Chinese products, which offsets the impact of some tariffs.
This past week, President Trump announced another round of tariffs on China. It will be 10% tariffs on $200 billion of Chinese exports, and this tariff rate will go up to 25% by year-end if there is no further deal reached. The tariffs exclude certain Apple items and various items like bike helmets.
China responded with 5-10% tariffs on an additional $60 billion of US exports, but their premier (second in government after their president) also stated China will not intentionally devalue its currency.
The market relaxed last week because the trade war didn’t escalate as badly as some analysts predicted, and there were broad gains in U.S. stocks and international stocks, including China’s stocks.
However, after the markets closed on Friday, the Wall Street Journal reported that China has cancelled its upcoming trade negotiations with the United States.
We’ll see in upcoming weeks how this develops, and it’s one of the big ongoing news items that affects stock market performance when news comes out. Economists predict that these tariffs on China could slow their GDP growth by about 0.5%-1% or so, out of their current GDP growth rate of over 6%. And the impact to the United States in the short/intermediate term is that these U.S. tariffs will likely raise prices on several goods for U.S. businesses and consumers. It will take some time, well into 2019, to see how they will affect the U.S. trade deficit with China.
For now, the U.S. stock market is relaxed. The volatility index of the market is now under 12, one of the lowest levels of the year.