Last week, rising tension between North Korea and the U.S. rattled the world’s markets. As the two countries traded tough words, concerns escalated and markets reacted emotionally to the news.[1] Though stress is building internationally, we remain committed to focusing on the market fundamentals that drive long-term value.
In the coming days, we will publish a white paper outlining the details of how markets have reacted to other significant geopolitical events. History shows that markets can fall in the wake of alarming news but do recover, given time.[2] We encourage you to stay tuned for the white paper and talk to us if you have questions or concerns.
Amidst the pressure last week, volatility returned to markets—and all three major U.S. market indexes turned south.[3] The Dow dropped 1.06%, the S&P 500 fell 1.43%, and the NASDAQ declined 1.50%.[4] Global markets also reacted as the MSCI EAFE lost 1.59% for the week.[5]
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Last week, markets marched ahead within a busy reporting week. The Dow rose 1.16% to close Friday on another new high.[1] The S&P 500 notched a record high during the week, despite closing the week slightly down 0.02%.[2] Meanwhile, the NASDAQ slipped 0.20%, and the MSCI EAFE rose 0.21%.[3]
Generally strong corporate earnings reports helped markets continue to hit highs. The majority of companies that have posted Q2 earnings so far have beaten their estimates. Those earnings performances helped push financials, materials, and energy stocks up by over 1% early in the week.[4] Health care companies also posted substantial earnings as S&P 500 health care stocks have risen 16% this year. Health insurer stocks have also increased by 22%.[5]
Additionally, Q2 Gross Domestic Product (GDP), consumer confidence, exports, housing, and oil all reported noteworthy developments.
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Last week, the Dow, S&P 500, and NASDAQ again hit record highs. The midweek peaks fell by Friday, though market performance remained strong.[1] By week’s end, the Dow dropped 0.27%, and the S&P 500 and NASDAQ dipped on Friday but closed up 0.54% and 1.19%, respectively.[2] The MSCI EAFE finished with a 0.46% increase.[3]
Corporate Earnings Drive Growth
Analysts noted that stocks were particularly “strong” last week due to generally robust Q2 corporate earnings reports. With roughly 20% of S&P 500 companies reporting, corporate earnings should remain solid through the quarter. So far, 73% of reporting companies beat their estimated earnings per share, and 77% have higher-than-expected sales against a 5-year average.[4]
Weakened Dollar Continues
The dollar continued its downward trend, dropping 1.3% during the week. So far, our currency has fallen 8.1% since the start of 2017. A weakening dollar will boost companies with exports or overseas business.[5] As such, the U.S. consumer will take a hit, since a falling dollar causes price increases on imported goods.[6] The latest fall started last week after the Fed expressed concerns over low inflation.[7]
By and large, European markets reacted negatively to the falling U.S. dollar, and uneven EU corporate earnings reports did not help either. With the euro’s value against the dollar rising to its highest point since January 2015, the value of EU company exports and overseas earnings measured in dollars will fall.[8]
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Last Friday, stocks closed on more record highs. The S&P 500 rose 1.41% and the Dow climbed 1.04%—both closing at new peaks.[1] The NASDAQ reported a 2.58% gain and the MSCI EAFE posted a 2.38% increase.[2] Despite continuing headlines from Washington, the markets remain productive and strong.[3] New Q2 numbers also rolled in last week, giving us a clearer picture of what happened from April through June.
Q2 Coming Into Focus
Over the second quarter, the S&P 500 rose 2.57%, the Dow gained 3.32%, and the NASDAQ jumped 3.87%.[4] Meanwhile, the MSCI EAFE improved by 5.0%.[5] Analysts are now predicting that Q2 Gross Domestic Product (GDP) will grow to 2.4%—stronger than Q1’s soft 1.4% increase.[6]
While we wait for more numbers and reports, here are some highlights so far:

• Corporate Earnings: Corporate Earnings should remain strong for Q2, with an expected S&P 500 earnings growth of 6.5%.[7] As of July 14, only 6% of S&P 500 companies have reported earnings.[8]
• Core Consumer Pricing: Core Consumer Pricing, which measures the price of consumer goods excluding food and energy, remained at 60-year historically low levels. June’s numbers increased by only1%—the third month in a row for low rates.[9]
• Retail Sales: Retail sales were soft, declining unexpectedly by 0.2% following May’s 0.1% drop and April’s 0.3% rise.[10]
• Labor Market: Employers hired at a record increase of 8.3% in May, filling 5.5 million jobs. Consequently, job openings fell in May to 5.66 million from April’s strong 6.0 million.[11] The strong labor market further reflected in June’s low unemployment rate of 4.4%.[12]

On the international front, global economic growth is set to post a predicted 3.0% increase for Q2. Emerging and advanced economies both should record positive results based on strong global trade growth and favorable economic indicators. Both China and Japan are expected to post strong economic growth.[13]
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As the country celebrated the Fourth of July last week, the markets experienced some volatility, though they finished a bit flat overall.[1] The Dow fell then rose to close the week up 0.30%.[2] The S&P 500 climbed a modest 0.07% for the week, and the NASDAQ finished the week up 0.21%.[3] The MSCI EAFE fell 0.48%.[4]
Internationally, European markets posted soft gains on Friday, though emerging markets fell for a second-straight week.[5] Further, gold dropped to a 5-month low, while bond yields rose globally on weakening bond markets.[6] In addition, world leaders met last week at the G20 Global Summit and issued a statement supporting open markets. They agreed to fight unfair trade practices, such as countries blocking or heavily taxing imports to protect domestic industries.[7]
 A Closer Look at U.S. Market News

• Auto Sales Continue to Drop: Auto sales dropped in June by 3% from a year ago. Though vehicle sales are still generally high, numbers in the second half of 2017 are expected to remain soft.[8] 

• Employment Numbers Give Mixed Signals: Payroll growth rose a strong 222,000, exceeding expectations of 170,000. The employment growth numbers, along with continuing low unemployment figures, reflect a high demand for workers. However, wage growth remains low at an annual rate of 2.5%.[9] 

• Inflation Stays Weak: Inflation came in at a weak 1.4% in May, staying well below the Fed’s target of 2.0%. Despite weak inflation numbers, the Fed appears committed to raise interest rates one more time this year.[10]

• Manufacturing Rises and Falls: The PMI manufacturing index closed at a low 0, down from May’s 52.7 on weak cost pressures and selling prices.[11] Meanwhile, some good news emerged: The ISM manufacturing index surprised expectations of 55.1 and rose to 57.8—the strongest number since August 2014.[12]

• Oil Prices Continue to Slump: Oil dropped to $44.33 per barrel on continuing oversupply concerns.[13] The week’s price erosion comes after a 14% drop in the first half of 2017.[14]

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Last week, markets kept relatively quiet despite the continuing drop in oil prices. The S&P 500 rose by 0.21%, the Dow increased by 0.05%, and the NASDAQ—the week’s best performer—jumped 1.84%.^[1] Internationally, the MSCI EAFE fell by 0.20%.^[2] Asian markets remained relatively mixed while European markets were down modestly.^[3]
A global glut of oil has led to 5-straight weeks of price declines. OPEC’s attempts to curb oil production have not yet played out as expected, as prices are down roughly 20% for the year. Though oil rose slightly on Friday due to a weaker U.S. dollar, oil markets closed the week at a 10-month low.^[4] Still, oil stocks and energy companies in general comprise less than 6% of stocks in the S&P 500 on a capitalization basis, down from 11% only 3 years ago. As such, they are less significant to the overall markets today than in the past.^[5]
What We Learned Last Week
 Despite oil’s problems, a few economic indicators for the week pointed to the potential for mildly stronger Q2 consumer spending.^[6]

• Existing Home Sales Rebound: Overall, existing home sales for May rebounded with a 1.1% increase from April to an annualized rate of 5.62 million sales. Single-family sales rose 1.0% for an annualized rate of 4.98 million, while condos sales rose by 1.6% for an annualized rate of 640,000.^[7]
  
• New Home Sales and Pricing Surge: New home sales for May rose 2.9% to a 610,000 annualized rate on strong pricing. Median house pricing jumped to $345,800, an 11.5% rise for the month. The 16.8% year-on-year increase is roughly double the actual sales gain of 8.9%.^[8]

• Low Jobless Rate Stays Steady: June jobless numbers have so far remained on track and consistent with the current historic lows. Last week’s data revealed that the 241,000 claims matched general consensus.^[9]

• Flash Purchasing Managers’ Index (PMI) Slows: The PMI flash composite index came in at 53.0 for the month versus 53.9 for the prior month. Though new orders and employment in the service sector appear optimistic, manufacturing’s new orders and output have fallen. The single index is a synthesis of data such as new sales orders, inventories, and employment. A reading above 50 indicates rising output versus the previous month.^[10] 

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Markets last week were mixed with leading tech stocks falling dramatically as some investors pulled profits.^[1] The NASDAQ took the biggest hit, finishing 1.55% down on the week—its worst week of the year.^[2] Meanwhile, the Dow rose 0.31% for the week, notching another record close on Friday.^[3] The S&P 500 fell 0.30%, and the MSCI EAFE closed the week down 1.22%.^[4]
The S&P tech sector dropped 3.3% on Friday; however, it remained up 18% for the year. Major tech stocks account for almost 13% of the total number of stocks in the S&P 500, while comprising nearly 40% of the S&P 500 increase for the year.^[5]
Internationally, Asian markets were mixed while European markets closed the week generally higher.^[6] The European equities markets took last week’s UK election in stride, though the pound dropped in response to the Conservatives losing their majority.^[7]
Domestically, monthly job openings exceeded 6 million in April. Hiring, however, has slowed to only 5 million per month, suggesting workers’ skills may not match job needs. Moreover, the economy continues to show signs of softening.^[8]
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Last week, the S&P 500, Dow, and NASDAQ closed at all-time record highs.^[1] The S&P 500 rose 0.96%, the Dow gained 0.6%, and the NASDAQ grew by 1.54%.^[2] Meanwhile, the MSCI EAFE gained 1.64% for the week.^[3]
Despite strong equity markets, bond yields dropped to their lowest point in the year.^[4] The drop in yield caused by rising bond prices, combined with soft employment numbers and low wage growth, could suggest a slowing economy or a tightening labor market.^[5]
While the U.S. equity markets advanced to new highs and bond prices rose, other markets were mixed for the week. Pending home sales dropped 1.3% in April, a second straight month of decline.^[6] Oil fell to $47.66 a barrel, the dollar dropped to a seven-month low against the euro, and gold gained 0.8% closing at $1,280.20.^[7]
Additionally, soft employment numbers and flat wages could lead to a disappointing Q2 Gross Domestic Product (GDP). With an eye on dropping inflation, the Fed will have to decide whether to still raise interest rates.^[8]
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Early last week, both the S&P and NASDAQ recorded all time highs before tumbling along with the Dow as political concerns rose.[1] By Friday, though, the markets had largely rebounded and steadied. The S&P 500 closed the week down 0.38%, the Dow saw a 0.44% loss, and the NASDAQ reported a 0.61% decline.[2] The MSCI EAFE reported up 0.79% for the week.^[3]
The CBOE VIX is designed to measure market volatility by using S&P 500 put and call index option prices.^[4] For most of the year, volatility in the markets has been low. However, the CBOE Volatility Index (VIX) spiked 40% midweek before falling back by week’s end, indicating a possible increase in market volatility.^[5]
Through the week’s ups and downs, investors followed some other important economic developments.
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Markets tuned out noise from Washington last week and continued to focus on economic fundamentals. Mildly rebounding retail sales and strong consumer sentiment seem to point toward a modestly stronger second quarter.
After a three-week winning streak, both the Dow and S&P 500 reported slight losses. The Dow closed with a 0.53% loss, and the S&P 500 reported a 0.35% decline for the week. The NASDAQ, however, rose 0.34% while the MSCI EAFE reported a modest 0.16% gain.
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