Geopolitics took center stage last week with U.S.-North Korea tensions leading to a cautious pullback across global markets and greater emphasis on safer investments. Given the ferocity of the rhetoric between the U.S. and North Korea, the market reaction seemed subdued. The S&P 500 dropped 1.4% and the MSCI ACWI slid 1.6%. The flight to safe havens pushed gold and bond prices higher. The Bloomberg BarCap U.S. Aggregate Bond Index rose 0.2% and gold climbed 2.4%.
There were relatively few economic releases this week. The job opening data was upbeat, surging to record highs, and the producer price index (PPI) slipped by 0.1% month-over-month (+0.1% Forecast). The CPI came in weaker-than-expected as well at 0.1% (0.2% Forecast). Inflation remains subdued in spite of continued tightening in the labor market.
What are we reading?
Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links:
Jobless claims remained low while edging up slightly. Producer prices were down an unexpected 0.1% in July compared to an increase of 0.1% in June. It is the worst reading in 11 months and supports the theme that inflation will remain low. The Federal Reserve inflation target of 2.0% seems quite far off at the moment.
The escalating tension between the U.S. and North Korea may eventually lead to an economic standoff between the U.S. and China. Economic sanctions against Pyongyang have not worked as North Korea continues its efforts to develop a nuclear missile capable of striking the U.S. Critics feel that there is a need to step up pressure on China, which accounts for 85% of North Korea’s trading volume.
While equities trade at record highs, volatility has traded at extreme lows most of the year. The VIX has jumped 20% over the last few days based on geopolitical concerns. A mean reversion for volatility might lead to a big migration for equities.
Fun Story of the Week
Storing things that are important to us is part of being human. However, please exercise wisdom in the things you keep. A collector of World War II memorabilia was going through a collection given to him from the possessions of a veteran who had recently passed away. In the collection, he found a live mortar shell. The bomb squad was called in and the shell was safely removed. The veteran knew there was some risk in keeping a live mortar round. Fortunately, he had wrapped it in bubble wrap to prevent any untimely knocks causing the shell to go off. Bubble wrap makes all the difference.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of CWM, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large and mid-cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.