Canadian stocks were unchanged and U.S. stocks were higher on the week but took a choppy path to get there. Worries of financial and currency turmoil in Turkey, renewed trade talks between the U.S. and China, and strong earnings reports all took turns driving daily market moves. Now that the second-quarter's earnings season is nearly over, we expect geopolitical events and policy changes to play a larger role in market moves, and these can prompt greater volatility. However, we expect better economic growth and double-digit earnings increases to provide support for rising stock prices over time.
For much of 2018, the stock market has been in a tug-of-war between policy risks and strengthening economic and corporate fundamentals. Two key forces were at play for the markets last week: 1) escalating worries about a falling currency and economy in Turkey, and 2) the tail end of earnings season for U.S. corporations. Each took its turn behind the wheel, with the former driving early-week losses, while the latter, along with news of trade talks with China, spurred the strongest one-day rally in the Dow since April. The issues drove sizable swings in the week, but we think they also provided important read-throughs that offer insight into what may lay ahead for the markets.
More than just Turkey trouble – Turkey's currency, the lira, has plunged 22% against the U.S. dollar in recent weeks, sparking worries of an economic and debt crisis in the country.1 The weakness in global stock markets may be the result of Turkey rekindling fears of 1997's Asian financial crisis (which began with a collapse of Thailand's currency) or 2011's eurozone debt crisis. However, we'd note that Turkey's GDP is smaller than Florida's, so perspective is warranted.
Glimmer of hope in the trade war – Thursday's market rally was fueled in part by news that U.S. and Chinese officials would resume trade talks later this month. Following several rounds of implemented and proposed tariffs between the world's two largest economies, markets cheered the sign of potential progress.
Strong earnings results: details reveal budding trends - Second-quarter earnings season is nearly complete, with many retail companies reporting last week, rounding out a strong quarter for corporate America. Eighty percent of S&P 500 companies have reported earnings above expectations with profits rising 25% versus the prior year, the second consecutive quarter above 20%.2 With earnings, in our view, being one of the most powerful drivers of longer-term market performance, the surge in corporate profits has offered solid support to stocks this year, with U.S. equities up 8% and Canadian equities up 4% year-to-date. 3
Sources: 1. FactSet, 7/23/2018 – 8/17/2018. 2. FactSet Earnings Insight. 3. U.S. equities represented by the total return of the S&P 500 Index. Canadian equities represented by the total return of the TSX Index.
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The only notable economic report coming next week is retail sales on Wednesday.
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