The Fed: Fed’s Powell may use Jackson Hole speech to discuss potential trouble ahead

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A buffalo holds up traffic near the Fed’s annual retreat in Jackson Hole.

Federal Reserve Chairman Jerome Powell may use his closely-watched speech in Jackson Hole to discuss potential trouble spots ahead for the economy and how the central bank might react.

“We’re no longer in the early innings” of the expansion,” noted Carl Tannenbaum, chief economist at The Northern Trust Co.

“Monetary policy has to think forward a little bit on how the business cycle and global economic environment will evolve,” he added.

Powell is speaking on “monetary policy in a changing economy” on Friday at 10 a.m. Eastern from the central bank’s annual summer retreat in the Grand Teton Mountains.

“This is a pretty narrow topic,” joked Michael Hanson, chief U.S. macro strategist at TD Securities.

Hanson said there is some chance Powell discusses what tools are available to the Fed when the next downturn occurs.

There remains concern the Fed does not have the ammunition to cushion the economy from a negative shock.

In the past, the Fed has cut interest rates by, on average, 500 basis points, or 5 percentage points, noted Tim Duy, senior director of the Oregon Economic Forum at the University of Oregon.

The Fed won’t have that luxury in the downturn, Hanson noted, with the Fed’s benchmark interest rates now set in a range of 1.75% to 2%.

Experts like former Fed Chairman Ben Bernanke are discussing alternate policy frameworks, such as temporary price level targets.

Read: Bernanke proposes tool to help bon markets know that rates would stay low

Hanson said the policy frameworks under discussion are all basically forms of forward guidance to convince markets that the Fed “is serious about keeping interest rates low for long periods of time.”

The Fed is likely to use quantitative easing again to keep long-term rates down. But there are concerns the policy might not be as effective given the central bank’s balance sheet remains so large.

The Kansas City Fed, which organizes the Jackson Hole program, won’t publish the speakers or papers at the event until it starts Thursday. The regional Fed bank has released only a general description of the topics to be discussed, including market concentration, advances in technology, and new bank regulations.

Tannenbaum of Northern Trust said he thought the conference would focus on the puzzle of why inflation remains “so quiescent” after the long economic expansion and whether the root cause is globalization, automation or a shift in balance from workers to firms.

Another question will be how central banks consider conditions outside their borders when they set policy.

“The case study of Turkey illustrates the decisions in one capital can reverberate in another,” Tannenbaum said. Many Turkish companies have large amounts of dollar-denominated debt.

Read: It isn’t only Turkey —Asia has excessive dollar debts

The third topic will be how large the central bank balance sheets should be and what purpose should they serve, he said.

The Fed’s program to reduce its balance sheet has yet to reach its planned peak monthly run-off and there are already signs the central bank may have to end the plan a lot sooner than anyone thought.

See: Wall Street doubts recent pledge of top Fed officials to keep balance-sheet reduction plan

Markets have a benign view of the Fed rate path ahead.

The yield on the two-year Treasury note
TMUBMUSD02Y, -0.32%
  is off 63 basis points from its 52-week high of 2.686% hit late in July.

And even with trade worries and expectations of rising interest rates, the Dow Jones Industrial Average
DJIA, +0.43%
  year-to-date is up 3.4%.


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BookWatch: Why annuities are a bad idea for almost everyone

“Don’t lose money in the Wall Street casino!” the radio announcer blared.

“It could take a lifetime to make up your losses in the stock market.”

Unless your lifetime is five years — that’s how long it took the market to make a full recovery after the Great Recession — he’s dead wrong.

He was using this fear tactic to sell annuities. And getting suckered into buying an annuity with him — or any broker — could be the biggest mistake you ever make.

You see, annuities aren’t wrong for everyone… Just most everyone.

If you’re unfamiliar with annuities — you give an insurance company your money and in return they pay you an income stream, usually for the rest of your life. In some annuities, if you die before you’ve received all of your money back, too bad for you. The insurance company keeps the money.

Seriously, that’s how it works.

Now, there are plenty of annuities where that’s not the case. Family members can receive cash back or even continued monthly income after your death — but you pay extra for that.

Essentially, you’re betting the insurance company that you’re going to live longer than they think you will. They take your money, invest it and give it back to you in dribs and drabs (with steep penalties if you want to withdraw more than the contract states).

Annuities are such terrible investments that the minute the government passed a law specifying that financial professionals had to act in their clients best interest, annuity sales fell off a cliff.

In 2016, new rules were passed by the Department of Labor that stated that brokers have to act as fiduciaries. That means they had to put their clients’ best interest ahead of their own.

Believe it or not, prior to the rule being passed, stock and insurance brokers could sell you anything they wanted — whether it was right for your or not. So typically, they sold whatever paid the highest commissions.

Annuities pay extremely high commissions — often 7% or higher of the total amount. So if a client was sold a $200,000 annuity, the salesperson might take home $14,000 up front.

Needless to say, there’s not a lot of incentive for him to put you in a low-cost index fund.

This new law is scheduled to go into effect this year, though that will likely be delayed.

As soon as the fiduciary rule was passed in 2016, sales of annuities fell 8%. They slid an additional 18% in the first quarter of 2017.

Sales of variable annuities, which are the worst of the worst, crashed 22% in 2016.

If these were such wonderful products, as defenders of annuities will maintain, why did so many people stop selling them — even before the law went into effect?

So why do people like them?

Fixed annuities prevent losses. You are typically guaranteed that the value of your principal will not go down regardless of what the stock or bond markets do.

Fixed index annuities allow the investor to take part in some upside, though it is usually very limited — about 4% per year in this low interest rate environment. So the investor is trading upside potential for downside protection.

If the market soars 20%, the investor will only make 4%. But if the market falls 20%, the investor won’t lose any money.

Another way they screw you

Let’s say you take out an annuity and your circumstances change. You need the money urgently. If you’re still within the surrender period, it’s going to cost you. Big.

A typical surrender period is seven years and the surrender charge starts at 7% and falls by 1% per year.



So if after two years, you need your money back, it’s going to cost you $10,000 ($200,000 x 5% = $10,000) to get your own money back.

Instead, take the money and invest it in Perpetual Dividend Raisers — companies that raise their dividend every year.

But I don’t want to risk any money, you say. After all, that’s one of the most attractive features of annuities.

Annuities are typically long-term contracts. People buy them in their 60s, 70s and even 80s, expecting to collect income for years in the future.

Consider that over 10-year periods, the stock market has only been down seven times in the past 80 years. And those seven times all were tied to the Great Depression or Great Recession.

In other words, you had to sell in the depths of historic financial collapses to not make money in the stock market over 10 years.

If you invested in 2000, near the top of the dot-com bubble and sold in 2009, near the bottom of the Great Recession, you were down 9%. Not good, but not horrendous considering you endured two epic stock market meltdowns.

Or consider this scenario… If you have the worst timing of any investor and put your nest egg into the S&P 500
SPX, +0.33%
  at the absolute top in 2007 — right before the financial collapse — you’d be up 91% (including dividends) 10 years later.

Just stop and think about that the next time market naysayers talk about the “Wall Street casino.”

As an industry saying goes, “Annuities are sold, not bought.”

Don’t be one of the people who gets sold.

This article is condensed from a chapter in ‘You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle without Getting a Job or Cutting Corners’.

Marc Lichtenfeld is the chief income strategist at The Oxford Club and the author of ‘You Don’t Have to Drive an Uber in Retirement: How to Maintain Your Lifestyle Without Getting a Job or Cutting Corners’ and ‘Get Rich with Dividends: A Proven System for Earning Double Digit Returns’.


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Ignore Trump and Musk — here’s how to find companies whose CEOs think long term

Whether you’re a fan of Tesla CEO Elon Musk or you think he’s just a nutjob, you owe him some gratitude as an investor.

That’s because he’s spotlighting an issue that regularly costs long-term investors a lot money: the tyranny of quarterly earnings reports.

The problem here is that quarterly reports enable investors and traders who like to impose their short-term thinking on CEOs to earn a quick buck — by pressuring CEOs to maximize near-term profits. This can hurt investors who are in it for the long haul.

Read: SEC studying frequency of corporate reporting after Trump tweet

Heaven forbid a CEO sacrifices near-term earnings to fund some cockamamie “visionary” plan that just might change an entire sector. The truth is, though, long-term thinking can be an investor’s best friend, as Warren Buffett loves to point out. The obsession with quarterly earnings reports gets in the way.

“They are really not good measures for a lot of public companies,” says Patrick McGurn, special counsel for Institutional Shareholder Services, which offers analysis that helps institutional investors make proxy voting decisions. “You want to look at what a company is going to do over the course of the cycle.”

Or longer, in the case of a pioneering entrepreneur like Musk. Musk now wants to take electric-car maker Tesla
TSLA, -8.93%
private, in part, to get away from the focus on quarterly results — and the obsession with inevitable short-term stumbles — by short-term thinkers.

But going private is a radical solution. It cuts off a company from market funding. And it will take Tesla shares out of the hands of Musk’s many true believers who now own the stock.

How autocratic leaders can help investors

Many companies take a more moderate approach to shutting down the short-term noise. They use dual share classes that concentrate voting power in the hands of a few people — often the founders. Or else founders own huge stakes, giving them enough voting clout to tune out the short-term thinkers.

Yes, these measures seem autocratic and undemocratic. So they are controversial. But they can actually pay off big time for investors.

Back in 2011-2012, for example, I suggested Amazon
AMZN, -0.23%
Facebook
FB, -0.52%
and Alphabet
GOOGL, -0.67%
in my stock newsletter, Brush Up on Stocks, when they were out of favor, in part because each had ownership structures that shielded them from the threat of takeovers and interference by activists. But this gave founders the power to brush off investor concerns about a lack of near-term profits, and invest in strategic plans.

Those stocks have all been great outperformers since then — up fivefold or more. Amazon has advanced almost 10-fold.

Those worked out, but autocratic ownership isn’t always good. For every Mark Zuckerberg or Jeff Bezos, there’s a management entrenched by a mechanism such as special share classes or devices that make it hard to change boards. Protected from the threat of takeover, bad managers can milk companies for extravagant pay or give juicy contracts to friends at the expense of shareholders, cautions McGurn, at Institutional Shareholder Services.

As an investor, how do you navigate this mess? What’s the best way to identify companies that have shielded themselves from short-term thinking, but don’t track the downside of entrenched management into your portfolio?

Here are the three solutions

1. Know your autocratic managers

When companies have dual share classes that give management concentrated voting power, don’t run away. Instead, hear them out so you can decide whether they have a long-term plan that makes sense. Listen to their earnings calls and study their filings.

You won’t always get it right. But good CEOs with concentrated voting power realize they have to explain what they are up to. And they spend a lot of time doing so. “They know they can’t just go to market and say ‘trust us,’ ” says Bryan Hinmon, portfolio manager of the Motley Fool Global Opportunities Fund
FOOLX, +0.28%

Back in 2012 when Facebook, Amazon and Google were getting bashed for sacrificing near-term profits to fund long-term plans, CEOs and top managers were making a good case in earnings calls that their strategies made sense.

Around this time, Facebook’s Zuckerberg was trying to get mobile right because he knew it was the future for social media. He took a lot of heat, but he turned out to be right. Google was fine tuning Android and fiddling with self-driving cars. Android now helps Google better target ads. Autonomous vehicles seemed weird at the time, but they may be the next big trend in automobiles.

And back then, Bezos was building out server farms that eventually powered Amazon’s AWS cloud services, a key source of profits now.

“It is funny to think back that everybody was so upset with Bezos for not sticking with trying to be the world’s best online bookstore,” says Lamar Villere, portfolio manager of the Villere Balanced Fund
VILLX, +0.24%

Hinmon, at Motley Fool, cites Atlassian
TEAM, -0.10%
in messaging and collaboration software, and Watsco
WSO, +1.19%
in heating and air-conditioning equipment, as companies he owns where concentrated voting power helps managers pursue long-term strategies that benefit investors, even at the expense of short-term gains.

Here’s are a few shortcuts to help you identify the autocratic managers who are on your side because they think and invest long term.

• Favor founder-run companies because they often outperform. This makes sense. Founders are driven by the desire to build companies, as opposed to simply getting rich. Their passion for building does not go away once they make billions. So it’s easier to trust them than run-of-the-mill managers who never founded a company but have concentrated voting powers.

• Look for companies where top managers and founders own lots of the stock. As examples, Albert Meyer, portfolio manager at Bastiat Capital, cites Tencent
TCEHY, +3.37%
IPG
IPGP, -1.07%
Checkpoint Software Technologies
CHKP, +0.55%
Seaboard
SEB, +0.42%
Regeneron
REGN, +0.67%
 and Amerco
UHAL, +0.49%

• Be wary when top managers have special voting rights and proportionally less money in the stock, says McGurn, at ISS. This can happen, for example, when managers own special shares that give them 10 votes per share. When managers have little capital at risk but a lot of voting power, that can lead to mischief. Those managers have probably filled the board with cronies. So there could be poor board oversight.

2. Favor companies that suspend quarterly guidance

President Donald Trump wants companies to report earnings just twice a year. This is a bad idea. Moving to twice yearly reports like those used in a lot of foreign countries cuts down on news flow.

“As an investor, you ignore information at your own peril,” says Hinmon. “Having new information to update your thinking is critical.” Meyer, at Bastiat Capital, regularly buys shares of foreign companies but he says he feels less secure in companies that don’t provide quarterly updates.

A compromise here is for companies to eliminate quarterly guidance. You should favor companies that do this, because it gives managers more latitude to focus on the long term.

Berkshire’s
BRK.B, +0.28%
 Buffett and J.P. Morgan
JPM, +0.00%
 CEO Jamie Dimon recently called on CEOs to reduce “short-termism” by asking them to stop quarterly guidance. They said it often leads to “an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability,” in a Wall Street Journal op-ed. Companies frequently hold back on technology or research-and-development spending to meet guidance shortfalls caused by factors outside their control like bad weather, believes Buffett.

A 2006 McKinsey study concluded earnings guidance does nothing to help shareholders. But it distracts managers. Invest in companies that don’t mess with guidance, and you’ll know managers don’t have this distraction.

3. Favor companies whose CEOs are paid by stock returns

In 2010, I asked John Morgan, the CEO of a little company called Winmark
WINA, +0.24%
why he was buying so much of his company’s stock. He told me he didn’t get paid via stock options. So buying stock was how he wanted to get exposure to upside from his efforts to develop an equipment-leasing business at Winmark.

I liked that he was using his own money to align himself with shareholders. And he had spent a career in this business before launching it inside Winmark, a retailer at the time. So I suggested Winmark in my stock newsletter in June 2010. It traded at $29 then, and now it’s at $148, for 410% gains.

The key lesson here? When CEOs take little or no pay and they get a lot of their reward through stock exposure, it’s a good sign they are thinking long term.

A good example right now is Axon Enterprise
AAXN, +2.38%
(formerly Taser), says Villere, whose Villere Balanced Fund owns the stock. Earlier this year, founder and CEO Patrick Smith zeroed out his salary for 10 years. Instead, he’ll get rewarded via equity grants that vest in increments as Axon hits profitability and market-cap targets. The stock grants won’t fully vest unless Axon’s market cap rises 10-fold.

“Here’s a guy who is clearly playing the long game, and backing it up by his actions,” says Villere. As an example of Smith’s long-term thinking, Villere cites Smith’s decision to give away body cameras to customers including police. This sacrifices short-term profits. But it attracts long-term customers of Axon’s archiving, cloud and software services that support use of the body cameras.

Ironically, Smith’s no-salary plan is modeled after a similar one used by Musk at Tesla. In Musk’s plan, his option grants only pay out (big time) if Tesla hits aggressive market-cap and profitability milestones over 10 years. That’s a clear sign that Musk is thinking and investing in Tesla for the long haul, which will likely benefit long-term investors in Tesla’s stock.

Too bad they won’t get that payoff if Musk succeeds in taking the company private to shut down the noise from the short-term thinkers.

At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested TSLA, AMZN, FB, GOOGL and WINA in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.


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Mark Hulbert: Why gold has performed so poorly even though stock markets are volatile

What’s it going to take for gold market timers to become so pessimistic that a contrarian buy signal is finally triggered?

The answer remains just as elusive today as it was a month ago, the last time I asked this question. All we know for sure is that gold’s
GCZ8, +0.66%
  plunge over the last couple of weeks is not enough. That’s because the gold timing community remains less bearish today than on the occasion of previous major lows — despite a plunging gold price.

Consider the average recommended gold market exposure level among a subset of short-term gold market timers (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at minus 18.2%. As I have indicated in past columns, previous lows have been accompanied by HGNSI readings at least as low as minus 30%.

To be sure, an HGNSI reading of minus 18.2% is lower than the 0% reading that prevailed a month ago, when I wrote my previous column on gold market sentiment. To that extent we’re closer to a contrarian buy signal than before.

But what is so surprising is that the HGNSI isn’t even lower. Over the past month gold has dropped more than $60, on top of an already-sizeable drop since bullion’s January high. As a result, the yellow metal is now more than $200 below that early 2018 high. And, yet, the gold timers as a group have yet to throw in the towel in a big way.

In fact, as you can see from the accompanying chart, the HGNSI’s underlying trend so far this year has been a surprisingly gradual and orderly decline. This is a textbook portrait of the so-called “slope of hope” that bear markets like to descend, and just the opposite of the “wall of worry” that bull markets like to climb.


Major lows are typically accompanied by panic selling in which any remaining bulls fall over themselves to climb onto the bearish bandwagon. That’s not what we’re seeing. On the contrary, the HGNSI has actually risen slightly over the last couple of days, as gold timers engage in bottom-picking.



This situation could change quickly, of course. A mad rush to jump on the bearish bandwagon could happen quickly. Yet there’s no reason to jump the gun, since as we’ve seen over the past month, the timers can behave in unexpected ways. Contrarians recommend that we instead let the market tell its story in its own time.

Meantime, the gold market could certainly rally for a day or two. But, absent a much stronger sentiment foundation, it’s all too likely that such a rally would be nothing more than a dead cat bounce rather than the beginning of a sustainable advance.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com . Create an email alert for Mark Hulbert’s MarketWatch columns here  (requires sign-in).


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Market Extra: Italy draws fresh scrutiny, as investors eye market risks in aftermath of Turkish-lira crisis

As skittish investors scan for the next trouble spot in the wake of Turkey’s currency dilemma, some market participants are turning a fresh eye to perennial market bugaboo—Italy.

The third-largest economy in the eurozone has resurfaced on investors’ radars as its populist government plans next year’s budget, which economists say are likely to expand fiscal deficits more than hoped, pitting the country against the fiscally conservative European Union.

Concerns over Italy’s fiscal road map have put local bank stocks and bonds under pressure, reviving talk of a dreaded “doom loop”, that is, the way in which Italian banks are dragged lowered by the deteriorating perception of its beleaguered government.

See: Here’s why Italy and financial markets are still headed for a showdown

“Italy should be the main focus as we enter the weekend with some pretty poor performance in their markets,” said Peter Boockvar, chief market analyst for the Bleakley Advisory Group, in a Friday note.

Investors are worried that Italy isn’t on a firm financial footing. That is, if, as discussed, lawmakers vote to remove the constitutional requirement that Rome maintains a balanced budget. Other policy measures floated that could strain government revenues include tweaks to controversial pension reforms and an introduction of a flat taxation system.

Those worries have combined to place pressure on Italian bond prices, which have fallen, lifting the yield for the 10-year government debt
TMBMKIT-10Y, +0.25%
by around 40 basis points since the beginning of the month to 3.132%. That marks its highest rate since May after populist parties formed a coalition government in Italy.

Bondholders are demanding richer compensation for holding risky Italian debt as the yield gap between Italian paper and relatively safer German government bonds
TMBMKDE-10Y, -4.24%
 widened by 285 basis points, or 2.85 percentage points. Bond prices fall when yields rise and a widening gap between German paper and Italian sovereign debt has often been viewed as a sign of growing disenchantment with Italy’s financial outlook.

On top of that, data from the Bank of Italy shows net foreign outflows of Italian government debt rose to $33 billion in June, after $25 billion in May.

“With doubts about the quality of policy-making and even the government’s commitment to the euro, we suspect that this will help to push the 10-year [Italian bond] yield to 3.5% by the end of the year,” said Oliver Jones and Jack Allen, analysts at Capital Economics, in a Friday note. That could be mean worsening news for the Italian financial system.

Fretting over Italy’s budget or a rollback of pension reforms could prompt credit-rating firms to cut Italy’s sovereign debt rating by one notch, leaving it hovering above ‘junk’, a move that would spark further outflows from investors, analysts said. Receding into the ‘junk’ rating bucket would also make Italy ineligible for future asset purchases by the European Central Bank, which has been a backstop buyer of the country’s debt.

Moody’s Investors Service is placing Italy on review for a potential downgrade. A lower rating from a rating agency tends to translate to higher borrowing costs for the Italian government and corporations based in the southern European country.

Meanwhile, the FTSE MIB index
FTSEMIBN, -0.53%
 is down 8.1% this month, led by the slump in Italian bank shares including Banca Monte dei Paschi
BMPS, -4.72%
 and UniCredit
UCG, -3.17%
UCG, -3.17%
FactSet data show.

Analysts say further weakness in Italian bonds could hurt an Italian financial sector still struggling to sell souring loans from years of anemic economic growth. Italian sovereign paper are the bedrock of their banks’ capital, especially as the ECB looks to end its asset purchases this year, said Nick Kounis, head of macro and financial markets research at ABN AMRO.

If a bond market slump stretches the balance sheets of Italian banks, they may be forced to raise cash by selling assets.

As of last June, Italian sovereign debt comprised around 145% of Tier 1 capital, a key gauge of a bank’s ability to absorb losses, in two of Italy’s biggest lenders, UniCredit SpA
UCG, -0.48%
and Intesa Sanpaolo
ISP, -0.77%
according to Eric Dor, director at IESEG School of Management.

The renewed attention on Italy comes as investors watch for contagion from the Turkish lira’s
USDTRY, +3.2826%
 weakness, leading investors to take a dim look of countries with high debt loads, said Boockvar. The lira is down 37% against the U.S. dollar this year.

Moreover, European banks made extensive loans to Turkish corporations in euros as they offered better margins than lending to European firms which could borrow at ultralow interest rates. Though much of that lending originated from Spanish banks, Italian UniCredit is also exposed directly to the Turkish corporate sector as it owns 40% of Yapi Kredi Bankasi AS bank, a local subsidiary.

To be sure, Italian markets were veering toward trouble before the lira accelerated its slide.

“The spike that we saw in Italian yields and the reversal in the share price of Italian banks preceded the decline in the Turkish lira,” wrote David Owen, chief European economist for Jefferies.


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Bond Report: Treasury yields hold ground, but end week higher as U.S.-China trade tensions ease

Treasury yields saw muted trade Friday as fears over the Turkish lira’s decline were offset by reports that Washington and Beijing were laying the groundwork for possibly ending their protracted trade dispute by November. However, for the week, yields edged higher across debt maturities as appetite for havens abated by the end of the 5-session stretch.

The yield for the benchmark 10-year note
TMUBMUSD10Y, +0.03%
 was mostly flat at 2.873%, leaving its weeklong climb at 1.4 basis points. The 2-year note yield
TMUBMUSD02Y, -0.32%
was unchanged at 2.620%, but up 2 basis points for the week.

The 30-year bond rate
TMUBMUSD30Y, -0.24%
 was down 0.3 basis point to 3.029%, trimming its weeklong advance to 1.1 basis points.

Bond prices move in the opposite direction of yields.

Hopes that Washington and Beijing may resolve their trade spat surged after reports said China would send a delegation to the U.S. later in August for further talks, easing demand for haven-related assets like U.S. government paper. The two largest economies in the world are creating a plan to end their dispute by November.

“The Treasury market responded positively to the meltdown in Turkey but retreated little on the news that the U.S. and China were resuming trade talks…The fact that U.S.-China talks are on again is a potentially encouraging sign that the escalation of tensions will not be prolonged or hyperbolic, and increases the chance that the trade tensions eventually result in a trade agreement,” wrote Ward McCarthy, chief financial economist for Jefferies.

However, the bond market continued to benefit from the rapid depreciation of the Turkish lira
USDTRY, +3.5779%
after the troubled currency snapped its three-day rebound to slump more than 3% against the dollar. Fears that the currency could continue to weaken have drawn talk of contagion, pushing investors into haven assets like Treasurys. On Thursday, the U.S. warned it would prepare further sanctions against Turkey if U.S. pastor Andrew Brunson wasn’t released.

Although only a small corner of the global economy, Turkey is in the throes of a currency crisis that has inflicted rapid inflation on its citizens and ramped up the cost of debt service for its corporations, many of whom had borrowed freely in dollars and euros.

The country’s finance minister Berat Albayrak hosted a news call on Thursday in an attempt to reassure investors. He promised that capital controls weren’t to be on their way, refuting concerns market participants would struggle to cash out their investments and take their money out of the country’s borders. But economists say the Turkish central bank’s reluctance to raise interest rates mean the underlying policy problems remain unresolved.

See: Investors are using alternative strategies to wager against Turkish lira

Read: It isn’t only Turkey—Asia is the ‘elephant in the room’ in excessive dollar debts

Looking ahead for next week, investors are gearing up for the Federal Reserve’s annual Jackson Hole symposium late next week where central bankers could discuss a potential of hot issues, including the terminal point of the Fed’s balance sheet reduction plan. Fed Chairman Jerome Powell’s speech will be about “monetary policy in a changing economy,” the central bank said Thursday.

The Fed’s latest meeting minutes are due to be released Wednesday, before the symposium’s start, and could shed light on the issue, as well. A few analysts have cited the Fed’s bond-buying and its bloated portfolio of securities for depressing U.S. long-term bond yields.

“The most interesting part of the minutes will be about the balance sheet outlook. Unfortunately, recent speeches by FOMC members suggest that there is not yet a strong consensus, so we think at most we will see the various options being laid out,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a Friday research note.


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Market Snapshot: Dow logs highest close since February on optimism over trade talks

U.S. stocks rallied for a second session Friday, with the Dow Jones Industrial Average closing at its highest since February as optimism that the U.S. and China will eventually resolve their trade standoff offset fears about Turkey’s currency crisis.

However, weak tech names, notably Tesla Inc., Nvidia Corp., and Applied Materials Inc., limited the Nasdaq’s upside momentum.

How did the main benchmarks fare?

The Dow industrials
DJIA, +0.43%
gained steam as the session progressed to rise 110.59 points, or 0.4%, to 25,669.32, its highest close since Feb. 26. For the week, it rallied 1.4%. The S&P 500 index
SPX, +0.33%
climbed 9.44 points, or 0.3%, to 2,850.13, rising 0.6% for the week.

The Nasdaq Composite
COMP, +0.13%
added 9.81 points, or 0.1%, to 7,816.33 for a weekly drop of 0.3%. The iShares PHLX Semiconductor ETF
SOXX, -0.75%
a popular index that tracks semiconductor manufacturers, fell 0.8% on weakness in quarterly results from chip makers Nvidia
NVDA, -4.90%
 and Applied Materials
AMAT, -7.72%
 Analysts have also noted that tech companies have the most exposure to foreign sales.

On Thursday, the Dow, S&P 500 and Nasdaq Composite
COMP, +0.13%
all rose with the blue-chip index logging its best day since April.

Read: This bull market in U.S. stocks stands just days away from the history books

What drove the market?

Investors continue to monitor the latest developments on the trade front. On Thursday, there was cause for optimism as the U.S. and China prepared to resume trade talks next week. Officials from both countries are also working on a road map to reach some sort of a deal that will lead to a summit between President Trump and Chinese leader Xi Jinping in November, The Wall Street Journal reported.

But Turkey remained a concern with the Turkish currency down more than 4% against the U.S. dollar
USDTRY, +3.5762%
with the buck buying 6.053 lira, compared with 5.8246 lira late Thursday in New York.

While geopolitical issues surrounding trade and Turkey will likely remain short-term market drivers, investors are also monitoring the final batch of second-quarter results, which are expected to neutralize some of the headwind from abroad.

What were strategists saying?

“Dealers will be paying close attention to the trade talks between the U.S. and China, as well as the political wrangling with Turkey. U.S. stocks are holding up relatively well, but if global sentiment sours, the impressive strength of the Dow Jones and S&P 500 could be chipped away at,” said David Madden, an analyst at CMC Markets UK, in a note.

Which stocks were in focus?

Tesla Inc.
TSLA, -8.93%
 shares slumped 8.9% after Chief Executive Elon Musk told the New York Times the past year had been “excruciating” and “the most difficult and painful” of his career.

Nvidia and Applied Materials both reported earnings late Thursday. A decline in cryptocurrency-mining sales weighed on Nvidia, sending shares down 4.9%, while a weaker-than-expected guidance pushed Applied Materials shares down by 7.7%.

Nordstrom Inc.
JWN, +13.20%
soared 13% after the retailer posted better-than-expected earnings and raised its outlook.

Farm-equipment maker Deere & Co.
DE, +2.36%
fell after issuing a downbeat growth outlook but since has recovered to rise 2.4%.

DSW Inc.
DSW, -4.85%
shares sank 4.9% after the stock was downgraded to negative from neutral at Susquehanna Financial Group due to higher costs and margin pressure.



Which economic data were in the spotlight?

The University of Michigan said its consumer-sentiment index in August fell to 95.3, down from 97.9 in July, the lowest level in 11 months. Economists polled by MarketWatch expected a reading of 98.5.

Meanwhile, U.S. leading economic indicators jumped 0.6% in July.

Check out: MarketWatch’s Economic Calendar

What did other markets do?

European stocks were mixed and Asian markets all rose except China’s Shanghai Composite Index
SHCOMP, -1.34%
 which closed down 1.3%, ending the week down 4.5% and marking the lowest close in nearly two years.

Oil futures
CLU8, +0.67%
 were higher while gold
GCZ8, +0.59%
 settled mostly unchanged and the U.S. dollar
DXY, -0.51%
 fell 0.5%.

—Victor Reklaitis contributed to this article


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Currencies: Dollar heads for first weekly loss in a month; yuan lifted by trade talks news

The U.S. dollar index saw a solid pullback on Friday, notably against the euro and the British pound, putting the gauge on track for a 0.2% loss this week—its worst performance in about a month, according to FactSet.

The ICE U.S. Dollar Index
DXY, -0.49%
which measures the greenback against six developed market rivals, slipped 0.5% to 96.133.

The buck also weakened against the Canadian dollar
USDCAD, -0.7525%
which rallied on the back of an inflation report. The data showed that Canada’s consumer prices rose 3% in the year leading up to July, beating consensus estimates of 2.5%. Inflation is one of the key data points used for central banks to determine their monetary policy path, and Friday’s data gave hope of a Bank of Canada hike. The U.S. dollar last bought $1.3063, down from $1.3157 late Thursday.

Japan’s yen
USDJPY, -0.26%
 was also stronger, with the buck slipping to ¥110.61, compared with ¥110.89 late Thursday in New York.

The broader WSJ Dollar Index
BUXX, -0.29%
which incorporates some emerging markets besides the Group of 10 largest economies, didn’t fare much better and fell 0.3% to 89.85.

Read: Stock-market investors should brace for a weaker dollar, says Goldman Sachs

Read: Does Donald Trump really love a strong dollar?

China’s yuan strengthened in the afternoon of the U.S. session on Friday, following a report that the U.S.-China trade talks scheduled for later this month will just be the first step in a road map leading up to meetings between President Donald Trump and China’s President Xi Jinping in November. The news that China and the U.S. would pick up their trade negotiations again, which benefited risk sentiment on Thursday.

The dollar bought 6.8314 yuan offshore
USDCNH, -0.4402%
up 0.4%, and 6.8776 yuan in
USDCNY, -0.0726%
up 0.1%. The Chinese currency’s offshore rate is more reflective of market dynamics.

The buck also lost ground against other emerging-market currencies, amid the yuan slide. For example, South Africa’s rand
USDZAR, -0.4763%
which was one of the underperformers in the morning, retraced its losses.

Read: 3 reasons the selloff in Turkey’s lira matters for markets all over the world

Elsewhere, Turkey’s lira
USDTRY, +3.7925%
 was under pressure after three days of respite and worries over further sanctions. On Thursday, Treasury Secretary Steven Mnuchin said Turkey could face additional U.S. sanctions over the detention of pastor Andrew Brunson, whose status has caused a diplomatic spat between the two.

Late Thursday, President Donald Trump tweeted that Turkey had taken advantage of the U.S. for too long.


The dollar moved back above 6 lira on Friday, last buying 6.0461, up 3.8%, while the euro bought 6.9158
EURTRY, +4.3926%
up 4.3%.

Don’t miss: Turkey’s woes won’t trigger a full-blown crisis across emerging markets, economist says

Also read: Opinion: Turkey has torn up the playbook on dealing with emerging-market crises


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Market Snapshot: U.S. stocks advance with S&P 500, Dow poised for weekly gains

U.S. stocks extended gains Friday with the Nasdaq joining the S&P 500 and the Dow Jones Industrial Average in positive territory as optimism that the U.S. and China will eventually resolve their trade standoff offset fears about Turkey’s currency crisis.

However, weak tech names, notably Tesla Inc., Nvidia Corp., and Applied Materials Inc., are capping the Nasdaq’s upside.

What are the main benchmarks doing?

The Dow industrials
DJIA, +0.49%
gained steam as the session progressed to rise 132 points, or 0.5%, at 25,690, while the S&P 500 index
SPX, +0.38%
climbed 10 points, or 0.4%, to 2,851. The Nasdaq Composite
COMP, +0.17%
reversed its direction to gain 8 points, or 0.1%, to 7,814.

The iShares PHLX Semiconductor ETF
SOXX, -0.70%
a popular index that tracks semiconductor manufacturers, was down 0.8% on weakness in quarterly results from chip makers Nvidia
NVDA, -5.26%
 and Applied Materials
AMAT, -7.53%
 

On Thursday, the Dow, S&P 500 and Nasdaq Composite
COMP, +0.17%
all rose with the blue-chip index logging its best day since April.

The Dow and S&P 500 are on pace for weekly gains of 1.5% and 0.4%, respectively, while the Nasdaq is down 0.3%, hamstrung by weekly declines for Microsoft Corp.
MSFT, +0.00%
Facebook Inc.
FB, -0.51%
 and Google-parent Alphabet Inc.
GOOGL, -0.59%
GOOG, -0.30%
over the past five sessions.

Read: This bull market in U.S. stocks stands just days away from the history books

What’s driving markets?

Investors continue to monitor the latest developments on the trade front. On Thursday, there was cause for optimism as the U.S. and China prepared to resume trade talks next week. Officials from both countries are also working on a road map to reach some sort of a deal that will lead to a summit between President Trump and Chinese leader Xi Jinping in November, The Wall Street Journal reported.

But Turkey remains a concern with the Turkish currency down more than 4% against the U.S. dollar
USDTRY, +3.7324%
with the buck buying 6.042 lira, compared with 5.8246 lira late Thursday in New York.

While geopolitical issues surrounding trade and Turkey will likely remain short-term market drivers, investors are also monitoring the final batch of second-quarter results, which are likely to neutralize some of the headwind from abroad.

What are strategists saying?

Jack Ablin, chief investment officer at Cresset Wealth Advisors, described Friday’s slump as a “cooling off” in a seasonally choppy period for equity markets, with investors following disappointing results from chip makers and a revealing newspaper interview with Tesla Chief Executive Elon Musk.

“It’s a little cooling off period after yesterday and obviously everyone is watching Elon Musk and some of the chip makers too,” Ablin said.

Stock markets had a strong finish yesterday over renewed hopes of a resolution to the trade spat between the U.S. and China,” said David Madden, an analyst at CMC Markets UK, in a note.

Which stocks are in focus?

Tesla Inc.
TSLA, -9.29%
 shares slumped 8.6% after Chief Executive Elon Musk told the New York Times the past year had been “excruciating” and “the most difficult and painful” of his career.

Nvidia and Applied Materials both reported earnings late Thursday. A decline in cryptocurrency-mining sales weighed on Nvidia, sending shares down 4.8%, while a weaker-than-expected guidance pushed Applied Materials shares down by 6.2%.

Nordstrom Inc.
JWN, +13.01%
soared 13% after the retailer posted better-than-expected earnings and raised its outlook.

Farm-equipment maker Deere & Co.
DE, +2.64%
fell after issuing a downbeat growth outlook but since has recovered to rise 2.7%.

DSW Inc.
DSW, -4.69%
shares sank 5.7% after the stock was downgraded to negative from neutral at Susquehanna Financial Group due to higher costs and margin pressure.



Which economic data are in the spotlight?

The University of Michigan said its consumer-sentiment index in August fell to 95.3, down from 97.9 in July, the lowest level in 11 months. Economists polled by MarketWatch expected a reading of 98.5.

Meanwhile, U.S. leading economic indicators jumped 0.6% in July.

Check out: MarketWatch’s Economic Calendar

What did other markets do?

European stocks were mixed and Asian markets all rose except China’s Shanghai Composite Index
SHCOMP, -1.34%
 which closed down 1.3%, ending the week down 4.5% and marking the lowest close in nearly two years.

Oil futures
CLU8, +0.73%
 were higher while gold
GCZ8, +0.41%
 settled mostly unchanged and the U.S. dollar
DXY, -0.49%
 fell 0.5%.

—Victor Reklaitis contributed to this article


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CryptoWatch: Crypto extends turnaround, adds more than $10 billion to market value

Digital currencies on Friday were on pace to log three consecutive sessions in the green, with all major coins trading in positive territory.

Bitcoin
BTCUSD, +3.61%
the most prominent digital currency, has popped back above $6,500, last trading at $6,519.09, up 4.1% since Thursday at 5 p.m. Eastern Time on the Kraken crypto exchange.

It has been a fruitful 72-hours for digital currency owners that suffered a setback earlier in the week after a vicious selloff wiped $20 billion off the value of all cryptocurrencies in the space of 24-hours. Friday’s broad-based rally has added $12 billion to the market cap of all cryptocurrencies, according to data from CoinMarketCap.

Ether at whim of futures market, says analyst

Ether
ETHUSD, +6.01%
which runs on the Ethereum network, has borne the brunt of the August selloff, hitting an 11-month low Tuesday, with crypto experts pointing to the flailing initial coin offering market for the reason behind the slump. However, leading crypto analyst Tom Lee, managing partner of Fundstrat Global Advisors, said in a research note that the introduction of Ether futures by the Bitmex exchange might explain the recent decline of the second largest digital currency.

Citing an analysis by Justin Saslaw of Raptor Capital Management, Lee said the Ether decline “is more due to the Bitmex futures/swap launch…and the impact of fundamentals is substantially less than perceived. Liquidity remains a critical factor in performance of digital assets, not surprising, given the early stage nature of these markets.”

Saslaw concluded that the introduction of the two-way liquidity had attracted short selling, which can be attributed to the weakness of Ether.


Token performance post futures launch

Ether is trading up 5.8% at $299.45 in early afternoon trading Friday.

Read: Are cash-strapped ICOs behind Ether’s underperformance?

Bitcoin will trade to $15,000 by year-end, says exchange co-founder

The co-founder of CoinCorner, a small Isle of Man-based crypto exchange, said in an email to MarketWatch that rising demand from wealthy individuals will see the world’s biggest digital currency pushed higher by year-end. “For the last few months, the price of bitcoin has been at $6,000 which we believe will continue for a while but we predict the price will reach $15,000 by the end of the year,” said Danny Scott.

”We are also seeing huge amounts of investment coming through from high net worth individuals and institutes purchasing bitcoin in high volumes. This all adds to the increase and interest of the cryptocurrency,” he said.

Read: Nvidia stock drops as crypto-mining decline overshadows earnings beat

Elsewhere, other altcoins, or coins other than bitcoin, are trading higher Friday. Bitcoin Cash
BCHUSD, +6.88%
is up 5.7% at $550.20, Litecoin
LTCUSD, +5.85%
has added 6.8% to $59.02 and Ripple’s XRP
XRPUSD, +9.70%
is trading at 33 cents, up 5.8%.

Futures were lagging behind spot markets Friday but showed gains in early trading. The Cboe Global Markets Inc.’s September contract
XBTU8, +1.49%
 is up 1.6% at $6,490 while the CME Group Inc August contract
BTCQ8, +1.17%
is up 1.6% at $6,510.

Read: ICO swindlers have absconded with some $100 million in investor dough, research firm says


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Best stock investing strategy now is just to ‘stay home’

U.S. stocks have been outperforming their non-U.S. counterparts since early February. That’s when President Donald Trump started his “America First” protectionist campaign aimed at making free trade fairer trade with America’s major trading partners.

During the current bull market, I had been recommending a “Stay Home” investment strategy until the fall of 2016. On November 8, 2016, I switched to a “Go Global” strategy on mounting evidence that the global economy was rebounding from the worldwide energy-led mini-recession of 2015. I returned to Stay Home in early June of this year in response to the escalating trade war.


U.S. stocks have done even better against major overseas stock indexes priced in local currency so far this year, because the U.S. dollar
DXY, -0.36%
 has soared in response to Trump’s escalating trade war (Fig. 1). Meanwhile, the 10-year U.S.Treasury bond yield
TMUBMUSD10Y, -0.22%
 has remained below 3.0% since May 24. All this suggests that the greenback and U.S. financial assets are both viewed as the winners in a trade war.

That said, Stay Home isn’t all about a risk-off approach to overseas economies. In fact, I believe that the outperformance of Stay Home so far this year also owes a lot to Trump’s stimulative tax cuts at the end of 2017. The preceding statement doesn’t seem to apply to the trade-weighted dollar, which jumped 7.4% since the year’s low on February 1 through Tuesday of this week (Fig. 2). This coincides with the implementation of Trump’s America First trade campaign.



I have often observed that the dollar tends to be strong (or weak) when the rest of the world is looking relatively weak (strong). That explains why the dollar tends to be inversely correlated with commodity prices, as measured by the Goldman Sachs Commodity Index (GSCI) ((Fig. 3). So far this year, the GSCI is holding up reasonably well. However, it is heavily weighted with the prices of petroleum products, which have been propped up by looming U.S. sanctions on Iranian crude oil.

Looking somewhat weaker is the CRB raw industrials spot price index, which has been weighed down by a significant drop in the price of copper in recent weeks. The price of copper remains highly and inversely correlated with the value of the dollar (Fig. 4) and (Fig. 5).

Of course, some of the relative weakness in the rest of the world reflects the relative strength provided the U.S. economy by Trump’s tax cuts. Fed officials continue to say that while the trade war may be a threat to U.S. economic growth, they believe the economy will remain strong enough to justify further hikes in the federal funds rate from 1.75%-2.0% currently to possibly 2.75%-3.0% in 2019. Meanwhile, both the European Central Bank and the Bank of Japan show no signs of normalizing their official interest rates, which remain abnormally low — just below zero (Fig. 6).

The main reason why Stay Home has been outperforming Go Global since the start of the bull market is that the forward earnings (i.e., the time-weighted average of consensus estimates for this year and next year) of the US MSCI stock price index has outpaced the forward earnings of the All Country World ex-US MSCI (in local currencies). The former is up 172% since it bottomed during the week of April 30, 2009 through the week ending Aug. 2 of this year, while the latter is up 78% over the same period (Fig. 7) and (Fig. 8).

Related: This veteran stock market strategist sees no recession — but he’s watching for weakness

Plus: Mortgage rates tumble as housing starts to drag down the economy


Ed Yardeni is president of Yardeni Research, Inc., a provider of global investment strategy and asset allocation analyses and recommendations. He is the author of “Predicting the Markets: A Professional Autobiography.” (2018). Follow him on Twitter and LinkedIn.


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The Tell: Cryptocurrency ventures face still more pain, says asset management firm

In an echo of the carnage following the collapse of the 1990s tech bubble, the cryptocurrency industry will see a significant number of additional projects fail, said one asset management firm.

Element Digital Asset Management said that while the recent drawdown of around 78% in the total value of cryptocurrencies from its peak matches the drop by the Nasdaq-100 Index
NDX, -0.40%
 following the bursting of the internet bubble, the cycle hasn’t ran its course, and investors in small projects should expect further disappointment.

“An analysis of historical project failures suggests that maximum pain in the altcoin market has not yet been felt. Investors should expect a total loss of investment in certain coins as projects eventually fail and get delisted,” wrote Thejas Nalval, Elements portfolio director, and Kevin Lu, the firm’s director of quantitative research.

Altcoins, are coins other than bitcoin
BTCUSD, +4.12%
the worlds biggest digital currency.

Read: The cryptocurrency market has shed more than $600 billion from its peak — what exactly happened?

Element evaluated the top 100 coins by market cap at the beginning of each year from 2015 through 2018 and found that a significant number of ventures had ceased operations. Of the top 100 ventures at the beginning of 2015, more than one-third were no longer running.


ICO failures

Despite the failure rate, it has not stopped an abundance of cash pouring into the initial coin offering market. After raising $6.2 billion in 2017, ICOs have raised $18 billion in 2018, to date, according to data from CoinSchedule. All this as warning signs grow.

An ICO is a crowdfunding tool used by cryptocurrency-related ventures that issue investors coins instead of stock.

Crypto-guru Barry Silbert told onlookers at the CNBC Delivering Alpha conference in July that 99% of cryptocurrencies would fail, and more recently, analysis from Diar, a blockchain data and analytics firm said close to $100 million had been swindled from investors by ICO promoters either before or during launches, in what’s known as an exit scam.


ICO funding

So how to pick a winner? Despite a downbeat outlook, the research team at Element said some signs can help investors spot a diamond in the rough.

“Projects that have already achieved sufficient decentralization such that the success or failure of the project isn’t dependent on the efforts of the founding team,” said Element, adding that projects that are aligned with companies that already turn a profit and projects that have consistent funding, often through mining rewards, would likely survive the continuing demise of crypto ventures.

Read: Nearly half of all 2017 ICOs have failed


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London Markets: U.K. stocks end slightly higher, but post biggest weekly drop since March

The U.K.’s main stock index ended the session slightly higher on Friday, but the benchmark posted its biggest weekly percentage drop in months as investors found few reasons to be confident into the weekend with a number of major political uncertainties up in the air.

In addition to recent concerns about Turkey’s currency crisis, the possibility of a so-called hard Brexit returned to the forefront of investor sentiment. Market participants are concerned that the next phase of talks for Britons in protracted negotiations to exit from the European Union will result in leaving the bloc without a defined trading arrangement.

How markets are performing

The FTSE 100
UKX, +0.03%
rose less than 0.1% to close at 7,558.59. For the week, it fell 1.4% in its biggest decline since the week ended March 23, according to FactSet data.

The British pound
GBPUSD, +0.1337%
was slightly higher against the dollar, buying $1.2737, compared with $1.2712 late Thursday in New York.

What’s moving markets

London Mayor Sadiq Khan reportedly told city officials to start making preparations for a no-deal Brexit to determine if the city could deal with potential shortages of medicines and food, underscoring worries that continuing negotiations between the EU and Britain may prove unsuccessful.

Khan in an article in the Guardian accused the government of “dragging its feet” and leaving EU citizens in limbo.

Meanwhile, U.K. Foreign Secretary Jeremy Hunt, speaking in the Netherlands, told ITV News that the U.K. would “find a way to prosper and thrive” in the event of no deal, but said it would represent a “huge geo-strategic mistake.”

In addition, volatility in the commodities sector were a key source of concern. The sector has been pressured by worries about global trade, and a possible knock-on effect in emerging markets from gyrations in Turkey
USDTRY, +3.7221%
 .

Antofagasta Plc
ANTO, -1.97%
one of the market’s recent biggest underperformers, fell 1.9% as the biggest percentage decliner on Friday. Thus far in August, it has shed nearly 20% of its value.

Such issues overshadowed some positive economic news. A report on July U.K. retail sales showed a monthly increase of 3.5%, compared with the 2.6% gain that had been expected. Excluding fuel, they were up 3.7%, above the 3.0% consensus forecast.

Don’t miss: A top London startup’s CEO flags the biggest Brexit threat to his industry



What are strategists saying?

“Traders will be watching keenly for any headlines indicating the likelihood of the U.K. crashing out of Europe without a deal,” said Jasper Lawler, head of research at London Capital Group.

Marios Hadjikyriacos, investment analyst at brokerage XM, in a research note on Friday said “the British pound barely advanced, largely unable to capitalize on strong U.K. retail sales figures. All eyes remain on the Brexit talks, where we may get some fresh comments today.”

“Continued lack of progress could confirm the current pessimistic narrative and hence keep the currency at current low levels, or even trigger some further moderate losses. In contrast, any hints the negotiations are moving forward may come as a positive surprise, leading to an outsized relief bounce,” he added.

Stocks in focus

Among notable gainers, RSA Insurance Group
RSA, +1.59%
 ended up 1.7% while British American Tobacco
BATS, +1.08%
 closed 1.2% higher.

On the downside, Next Plc
NXT, -1.16%
 lost 1.1% and Standard Charter Plc
STAN, -0.97%
 ended off 0.9%.

Shares of Royal Bank of Scotland Group PLC
RBS, +0.12%
 ended up 0.1% after being upgraded by HSBC bank analysts.


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Market Extra: The biggest risk that companies will face in the 2nd half of 2018 isn’t trade, says Goldman

American corporations may disagree with fund managers that a potential trade war is the biggest “tail risk” facing the U.S. stock market, but that doesn’t mean they’re expecting smooth sailing ahead.

Coming off one of the strongest quarters in recent memory, in terms of both earnings and revenue growth, as well as the percentage of S&P 500 companies beating forecasts, corporate management teams have begun to suggest that the operating environment will likely become somewhat more difficult in the second half of the year.

The reason? Rising costs and the impact that could have on companies’ record-high margin levels.

According to the Goldman Sachs “Beige Book,” an analysis of major themes discussed in the earnings calls of S&P 500
SPX, +0.15%
 companies, margins were the primary issue to get unusual attention over the reporting season, with another issue—wage growth—deeply connected to the first.

Read: As goes trade, so goes the stock market, Goldman warns

While both factors were cited in previous Beige Books, the one for the first-quarter season was more positive in tone, with corporate executives generally expressing optimism about the state of the economy. In the February Beige Book, released shortly after the tax-reform bill was passed, executives were far more bullish on the economy.

Profit margins are currently at all-time highs, per Goldman’s data, but the current level could represent a peak, or at least a plateau. “Pressures are mounting in the form of commodity price inflation, increased logistics costs, and labor inflation,” the investment bank wrote to clients, forecasting flat margins of roughly 11% through 2020.

Among notable cost increases, crude oil is up more than 40% over the past 12 months, while steel is up 43% over the same period.

The effect of these increases was felt broadly across the economy. Delta Air Lines
DAL, +0.32%
 cited the “rapid increase in fuel prices” as a drag on its near-term earnings, while PepsiCo
PEP, +0.56%
 cited price increases in both oil and aluminum.

Clorox Co.
CLX, +0.41%
 was another of the companies that Goldman singled out for its commentary on the impact commodity prices were having on margins. According to the post-earnings conference call between analysts and the company’s management, commodity costs affected margins by 130 basis points (or 1.3 percentage points), while logistics costs had an adverse impact of 100 basis points. Colgate-Palmolive
CL, +1.19%
 said raw material inflation had provided a headwind of 320 basis points to its gross margin in the quarter.

Wage growth is also having an impact on margins, per the Beige Book analysis. Goldman’s “wage tracker” shows growth of 2.7%, the second-highest reading since November 2008, and a wage survey it conducts averaged 3.2% in the three months of the second quarter, the highest quarterly average since the fourth quarter of 2007.

The growth is a byproduct of a labor market that continues to strengthen. In the second quarter, the unemployment rate fell to 3.8%, the lowest reading since 1969, the report read.

“Managements expect these pressures will not ease anytime soon,” the firm wrote to clients. “Looking ahead, firms are considering multiple strategies to reduce the costs, including “near-shoring” jobs and increasing investment in automation.”

Among the companies citing wage growth as a concern for margins was McDonald’s Corp.
MCD, -0.57%
 and United Technologies Corp.
UTX, +0.85%
where Chief Executive Gregory Hayes said, “There really is a labor shortage here in the U.S. and in Europe. And as a result of that, we’re seeing some cost pressure that we need to deal with.”

M. Keith Waddell, the chief financial officer of staffing company Robert Half International
RHI, -1.42%
said that “clients somewhat reluctantly acknowledge through their words and their actions that they have to pay more.”

While few companies cited trade as an issue that was currently having an adverse impact on their results—although there are some exceptions—it was clearly a focus for corporate management teams.

“Managements are keeping a close eye on tariffs and trade discussions but have yet to initiate large-scale plans to mitigate potential effects,” the report read. “Firms emphasized their commitment to free trade and their ability to adapt should the matter begin to have a direct effect on business. Notably, firms underlined nimble supply chains and the ability to pass costs onto customers.”

Goldman’s data indicate that 53% of S&P components discussed China in their calls, including companies with limited direct exposure to the region. Companies in the consumer sector, the investment bank wrote, “mentioned China most frequently despite having only moderate revenue exposure to China (<1%) and the Asia-Pacific region (<4%) in aggregate.”

According to FactSet, with nearly 94% of S&P 500 companies having reported, components posted earnings growth of 24.86% and revenue that was up 10%. According to Charles Schwab, 84% of S&P components posted earnings that were above forecasts, while 72% reported better-than-expected revenue. Both were above their historical averages.


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Three ‘tiebreakers’ that will determine if stock market bulls or bears are right

The benchmark S&P 500 Index seems to be stuck under a certain level.

I recently wrote: “This S&P 500 chart shows the market is at a critical juncture.” Since then, I have received emails and phone calls from investors amazed at how the market ran up to the line shown on the chart in that story, fell and then rose right up to the line again.

After having witnessed firsthand the power of this simple chart, many have been asking for an update. So let’s explore with an updated chart.

Chart

Please click here for an updated chart of S&P 500 ETF
SPY, +0.15%
It tracks the S&P 500
SPX, +0.15%
 Please note the following from the chart:

• Market bulls are trying to beat the bears into submission.

• Bears look at the potential double top shown on the chart and stand their ground. A double top would be a big negative.

• The low volume shows that neither bulls nor bears have great conviction.

• The result of this bull-bear battle is a churning market.

• Often in a situation like this, the relative strength index (RSI) is a helpful indicator. In this case, RSI can go either way.

• Divergence in RSI from the last peak shows that momentum has waned. This favors bears.

• Not shown on the chart, but many other market internals we watch at The Arora Report, favor the bulls.

• The pattern looks different for the Dow Jones Industrial Average
DJIA, +0.34%
Nasdaq 100 ETF
QQQ, -0.24%
and small-cap ETF
IWM, +0.08%

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Tiebreakers

As the market churns, the tiebreakers fall into the following three categories:

• The macro picture. On the positive side, trade war tensions are lessening. On the negative side, emerging market currencies are in turmoil.

• Fundamentals. The U.S. economy remains strong. Fundamentals in China are weakening. Please see “The biggest contagion risk to U.S. stocks isn’t Turkey — it’s an already-deteriorating China.”

• Market leaders. Walmart
WMT, +0.46%
is resurgent. There is strong buying in Apple
AAPL, +1.63%
Amazon
AMZN, -0.65%
is churning. There is selling pressure in Facebook
FB, -0.90%
Alphabet
GOOG, -0.78%
GOOGL, -0.84%
Microsoft
MSFT, -0.45%
and Netflix
NFLX, -1.45%
The semiconductor group is deteriorating. Earning projections are poor from Nvidia
NVDA, -4.33%
and Applied Materials
AMAT, -7.19%
Intel
INTC, -0.65%
and Micron Technology
MU, +0.14%
 are facing pricing pressure. AMD
AMD, +1.81%
remains a favorite of the momo crowd, but the smart money is selling it. Tesla’s
TSLA, -7.39%
stock is under pressure. Please see “Money flows of 11 popular tech stocks show Alphabet and Apple getting stronger.”

Investors should not make decisions based only on the chart. It’s wise to look at a more comprehensive model with a proven record in both bull and bear markets. That includes the ZYX Global Multi Asset Allocation Model, which has 10 inputs.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.


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Market Snapshot: Stock market sags as technology sector short circuits rally

U.S. stock-index benchmarks early Friday struggled to extend the prior session’s powerful rally as a decline in technology and consumer-discretionary shares weighed on the broader market. Lingering worries about Turkey’s fiscal health and China’s wobbly economy also limited stock-buying enthusiasm.

What are the main benchmarks doing?

The Dow Jones Industrial Average
DJIA, +0.08%
receded by 37 points, or 0.1%, at 25,522, while S&P 500 index
SPX, -0.08%
edged almost 7 points, or 0.2%, lower to reach 2,834. Nasdaq Composite Index
COMP, -0.53%
shed 50 points, or 0.6%, to 7,757. The technology-laden Nasdaq faced pressure as the tech sector retreated following a pair of weak results from chip makers late Thursday.

A popular fund, the iShares PHLX Semiconductor ETF
SOXX, -1.63%
which tracks semiconductor manufacturers, was down 1.7%, on weakness in quarterly results from chip makers Nvidia and Applied Materials.

On Thursday, the Dow, S&P 500 and Nasdaq Composite
COMP, -0.53%
closed higher by 1.6%, 0.8% and 0.4%, respectively.

The Dow and S&P are on pace for weekly gains of 0.9% and 0.2%, respectively, while the tech-laden Nasdaq Composite is down 0.8% for the week, hamstrung by week-to-date declines for Microsoft Corp.
MSFT, -0.67%
Facebook Inc.
FB, -1.04%
 and Google-parent Alphabet Inc.
AAPL, +0.92%
 over the past five sessions.

What’s driving markets?

Investors continue to monitor the latest developments on trade policy. On Thursday, there was cause for optimism as the U.S. and China prepared to resume trade talks next week. However, the new U.S. special representative for Iran said that the Trump administration was prepared to impose sanctions on all countries that buy oil from Iran, a list that includes China.

While geopolitical issues surrounding trade and Turkey will likely remain short-term drivers of market activity, investors are also monitoring the final results from the second-quarter earnings season.

Most recently, the Turkish lira was down about 4.7% against the U.S. dollar
USDTRY, +4.9154%
with the buck buying 6.1082 lira, compared against 5.8246 lira late Thursday in New York.

What are strategists saying?

Jack Ablin, chief investment officer at Cresset Wealth Advisors, described Friday’s slump as a “cooling off” in a seasonally choppy period for equity markets, with investors following disappointing results from chip makers and a revealing newspaper interview with Tesla Chief Executive Elon Musk.

“It’s a little cooling off period after yesterday and obviously everyone is watching Elon Musk and some of the chip makers too,” Ablin said.

“Stock markets had a strong finish yesterday over renewed hopes of a resolution to the trade spat between the U.S. and China,” said David Madden, an analyst at CMC Markets UK, in a note.

Which stocks are in focus?

Chip company Nvidia Corp.
NVDA, -4.10%
and chip manufacturer Applied Materials Inc.
AMAT, -8.61%
both reported earnings late yesterday. A decline in cryptocurrency-mining sales appeared to weigh on Nvidia, sending shares down 4.1%, while a weaker-than-expected guidance pushed Applied Materials shares down by nearly 8%.

Nordstrom Inc.
JWN, +10.71%
is on track for an up day after the retailer posted better-than-expected earnings and raised its outlook. The stock surged 10%.

The stock of farm-equipment maker Deere & Co.
DE, +1.05%
fell by about 2% after giving a downbeat growth outlook.

Bristol-Myers
BMY, -0.36%
 said the Food and Drug Administration had approved a treatment for small-cell lung cancer. Shares were down 0.3%.

Tesla Inc.
TSLA, -7.44%
 shares were down 6.3% after Musk told the New York Times the past year had been “excruciating” and “the most difficult and painful” of his career.

DSW Inc.
DSW, -7.18%
shares sank 7.6% in Friday trading after it was downgraded to negative from neutral at Susquehanna Financial Group due to higher costs and margin pressure.



Which economic reports in focus?

The University of Michigan said its consumer-sentiment index in August fell to 95.3, down from 97.9 in July, the lowest level in 11 months. Economists polled by MarketWatch expected a reading of 98.5.

Meanwhile, U.S. leading economic indicators jumped 0.6% in July.

Check out: MarketWatch’s Economic Calendar


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Outside the Box: What childless people need to know about planning for old age

Look around you. If you are in your 50s or 60s, you and many of your friends are likely still active and relatively healthy. You meet for lunch, you shop, you cook or you go out for a meal, you take vacations, you go to the gym or yoga studio, and you go to the doctor occasionally.

But eventually something called senescence happens. Senescence is the process of aging, the gradual wearing out of our bodies and minds. It happens to everyone and it will happen to baby boomers just like it is happening to our parents. In fact, in less obvious ways senescence starts happening when we are in our late 20s.

For the most part, we accept these changes as inevitable. Gradually, our muscles begin to lose girth, our skin starts to lose elasticity, and our joints begin to lose cartilage. Most people don’t notice this decline until their late 40s and early 50s, at which time the changes become more obvious.

Our 80s and 90s will look different

The 60s and 70s are a time for discovery and reinvention. Most people make a shift in their lifestyle in those decades. For those with children it is often a time of celebrating their accomplishments and the arrival of grandchildren. For those without children—a group that I call Solo Agers—discovery and reinvention should involve serious planning for an older life. (Of course, people with children still have to plan for their older years and can certainly benefit from these suggestions, but their options may be different than those without children.)

In our 80s and 90s we almost always face more life-limiting challenges. The big question is how do we prepare for it today? With no adult children around to serve as a safety net, the sensible path for us is to make some decisions while our bodies are still functioning adequately and our brains are still sharp.

After the age of 85, the likelihood of needing assistance with one or more activities of daily living, or ADLs, increases dramatically. In a 2009 study by the Institute on Aging, 40% of men and 53% of women age 85 or over reported needing help with at least one of the basic self-care tasks essential to maintaining grooming standards and good health.

These ADLs and IADLs (instrumental activities for daily living) are the functions that, for many, become more challenging as we age due to lack of mobility, strength, balance, or other physical or mental infirmities. They are the reason for the existence of structured communities with trained staff.

Yes, we all know someone in their 90s who still lives alone without apparent difficulty, and we all want to follow in his or her footsteps. But they are the outliers, not the norm. Will you be among them? No one knows. People of any age may temporarily or permanently lose the ability to care for themselves, but the odds go up dramatically as we get older.

By the year 2050, the over-85 age group will triple as a percentage of the population. That statistic raises another specter we must face: medical science has been tracking and studying the incidence of Alzheimer’s and other forms of dementia for several decades now. They estimate close to one-third of those who reach age 85 will experience some level of dementia.



Planning essentials

Below are the important elements of planning for your oldest age. To do it properly means getting out and doing some research. If you never need the plan, great. But if you take a tumble, have a medical event (heart attack, stroke), or begin to experience beyond-normal confusion, you will have the plan in place and you can put yourself safely in the hands of others.

1. Investigate long-term care insurance. Long-term care insurance, or LTCI, can be an important component of planning for people without children, but there are other options if you are not able to afford it or don’t qualify for it. Like life insurance, the younger you are when you purchase LTCI, the less it costs. Consulting with a financial planner will help you determine whether you should make this investment.

2. Research assisted living communities and board and care homes in your area. You will find they differ dramatically one from another. Have a conversation with their marketing people, but also talk to residents and people who work there. You will very likely find some appeal to you more than others. Remember, the default action by hospitals and doctors when you need care at home and no one is there to help you is to send you to a skilled nursing facility.

3. Investigate continuous care retirement communities (CCRCs) and life-care communities. These are wonderful living options for people without family support systems. They are also the most expensive options with amenities beyond what you would find in an assisted living community. However, you must move in while you are still independent.

4. Create or update your will, your advance directive for medical care, and durable power of attorney for finances. You will need a lawyer who specializes in elder law or estate planning for this. Lower cost professionals can often be found through your local Area Agency on Aging or Council on Aging. You can also explore with the attorney whether you should create a trust.

5. Hire a professional. If you have no extended family that you trust to make good decisions for you and follow your directives, consider hiring a professional fiduciary or professional guardian. They charge by the hour and they are much less expensive than a lawyer. Interview several and pick one you like and who has a good reputation.

6. Pre-need arrangements. Purchase a burial plot or register with the Neptune Society or other cremation service.

7. Spread the word. Once you have made some choices about where you would like to receive care and how you would like to spend the rest of your life, don’t keep it a secret. Share your plan with your doctors, your friends, and any living relatives that will likely be called in an emergency. When people know what you want it will be much easier for them to make decisions for you and ensure that you will get the care you need.

Sara Zeff Geber, Ph.D., is a speaker, author, retirement coach, and the founder of LifeEncore. Sara has a special interest in a group she calls Solo Agers: people over 50 without children and those aging alone. She is most recently the author of “Essential Retirement Planning for Solo Agers: A Retirement and Aging Roadmap for Single and Child-free Adults”. Geber lives with her husband in Santa Rosa, Calif.


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CryptoWatch: Did the introduction of futures sink the Ether cryptocurrency?

Digital currencies are on track to finish the week on a positive note with all major coins trading in the green early Friday.

Ether
ETHUSD, +5.48%
which runs on the ethereum network, has borne the brunt of the August cryptocurrency selloff, hitting an 11-month low Tuesday, with industry experts pointing to the flailing initial coin offering market for the reason for the slump. However, leading crypto analyst Tom Lee, managing partner of Fundstrat Global Advisors, said in a research note that the introduction of Ether futures by the Bitmex exchange might explain the recent decline of the second largest digital currency.

Citing an analysis by Justin Saslaw of Raptor Capital Management, Lee said the Ether decline “is more due to the Bitmex futures/swap launch…and the impact of fundamentals is substantially less than perceived. Liquidity remains a critical factor in performance of digital assets, not surprising, given the early stage nature of these markets.”

Saslaw concluded that the introduction of the two-way liquidity had attracted short selling, which can be attributed to the weakness of Ether.


Token performance post futures launch

Ether is looking to post its third consecutive winning day, trading up 5.5% at $298.50.

Read: Are cash-strapped ICOs behind Ether’s underperformance?

Bitcoin will trade to $15,000 by year-end, says exchange co-founder

The co-founder of CoinCorner, a small Isle of Man-based crypto exchange, said in an email to MarketWatch that rising demand from wealthy individuals will see the world’s biggest digital currency pusher higher into year-end. “For the last few months, the price of bitcoin has been at $6,000 which we believe will continue for a while but we predict the price will reach $15,000 by the end of the year,” said Danny Scott.

”We are also seeing huge amounts of investment coming through from high net worth individuals and institutes purchasing bitcoin in high volumes. This all adds to the increase and interest of the cryptocurrency,” he said.

A single bitcoin
BTCUSD, +3.71%
last changed hands at $6,465.50, up 3.4% since Thursday at 5 p.m. on the Kraken crypto exchange.

Read: Nvidia stock drops as crypto-mining decline overshadows earnings beat

Elsewhere, other altcoins, or coins other than bitcoin, are trading higher Friday. Bitcoin Cash
BCHUSD, +4.86%
is up 3.1% at $536.80, Litecoin
LTCUSD, +5.83%
has added 4% to $57.48 and Ripple’s XRP
XRPUSD, +8.77%
is trading at 31 cents, up 5.2%.

Futures were lagging spot markets Friday but showed gains in early trading. The Cboe Global Markets Inc.’s September contract
XBTU8, +1.64%
 is up 0.9% at $6,445 while the CME Group Inc August contract
BTCQ8, +1.33%
is up 0.7% at $6,450.

Read: ICO swindlers have absconded with some $100 million in investor dough, research firm says


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Market Snapshot: U.S. stocks poised to pull back after prior session’s powerful rally

U.S. stock-index futures were set to sag on Friday, suggesting the equity market could take a breather following a rally in the previous session, as the Turkish lira resumed a slide against the U.S. dollar.

What are the main benchmarks doing?

Dow Jones Industrial Average futures
YMU8, -0.26%
fell by 64 points, or 0.3%, to 25,528, while S&P 500 futures
ESU8, -0.24%
slipped 6.95 points, or 0.2%, to 2,838. Nasdaq-100 futures
NQU8, -0.35%
shed 25 points, or 0.3%, to 7,364. The Nasdaq could see some pressure from the technology sector, following a pair of weak results from chip makers late Thursday.

On Thursday, the Dow
DJIA, +1.58%
S&P
SPX, +0.79%
and Nasdaq Composite
COMP, +0.42%
COMP, +0.42%
closed higher by 1.6%, 0.8% and 0.4%, respectively.

The Dow and S&P are on pace for weekly gains of 1% and 0.3%, respectively, as of Thursday’s close, while the tech-laden Nasdaq Composite is down 0.4% for the week, hampered by week-to-date declines of around 1% to 3% for Microsoft Corp.
MSFT, -0.02%
Facebook Inc.
FB, -2.69%
 and Google-parent Alphabet Inc.
AAPL, +1.46%
 

What’s driving markets?

Investors continue to monitor the latest developments on trade policy. On Thursday, there was cause for optimism as the U.S. and China are prepared to resume trade talks next week. However, the new U.S. special representative for Iran said that the Trump administration was prepared to impose sanctions on all countries that buy oil from Iran, a list that includes China.

While geopolitical issues surrounding trade and Turkey will likely remain short-term drivers of market activity, investors are also monitoring the final results from the second-quarter earnings season.

Most recently, the Turkish lira was down about 4.7% against the U.S. dollar
USDTRY, +5.3720%
with the buck buying 6.1082 lira, compared against 5.8246 lira late Thursday in New York.

What are strategists saying?

“Stock markets had a strong finish yesterday over renewed hopes of a resolution to the trade spat between the U.S. and China,” said David Madden, an analyst at CMC Markets UK, in a note.

“It is worth remembering that this was only the confirmation of talks restarting, and there is no guarantee that any trade deal will be reached. Trade discussions have a history of being protracted, and just because traders want a trade deal doesn’t mean they will get one.”

Which stocks are in focus?

Chip company Nvidia Corp.
NVDA, -0.63%
and chip gear maker Applied Materials Inc.
AMAT, -0.17%
look on pace for down days after their earnings late yesterday. A decline in cryptocurrency-mining sales appeared to weigh on Nvidia, sending shares down 3.7% in premarket, while a weaker-than-expected guidance pushed Applied Materials shares down by 5.2% before the bell.

Nordstrom Inc.
JWN, +0.81%
is on track for an up day after the retailer posted better-than-expected earnings and raised its outlook. The stock surged 9% in premarket trading.

Tractor maker Deere & Co.
DE, +1.22%
fell 1% after giving a downbeat growth outlook.

Bristol-Myers
BMY, +1.41%
 said the Food and Drug Administration had approved a treatment for small-cell lung cancer.

Tesla Inc.
TSLA, -0.96%
 will likely be in focus again after Chief Executive Elon Musk gave an interview with the New York Times where he said the past year had been “excruciating” and “the most difficult and painful” of his career.



Which economic reports are on tap?

Releases on consumer sentiment for August and leading economic indicators for July are due at 10 a.m. Eastern Time, and an advance report on second-quarter services is also slated to hit at that time.

Economists polled by MarketWatch expect a reading of 98.5 for the sentiment index.

Check out: MarketWatch’s Economic Calendar


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Market Extra: These posh stocks could fare relatively well in a trade war

If you’re tracking the global trade fights, this can’t feel like a great time to own European companies that export posh goods. All of them would face challenges in a full-blown trade war.

However, Gucci parent Kering
KER, -0.15%
and LVMH Moët Hennessy Louis Vuitton
MC, -0.42%
could be relatively insulated, reckon UBS analysts, led by Helen Brand.

“Overall, soft luxury tends to be a little bit more defensive than hard luxury,” she tells Barron’s, referring to sellers of handbags and shoes, versus jewelers and watchmakers. “You don’t get the sort of destocking and restocking that you get in a wholesale channel.” And she adds: “Also, it’s just a slightly lower price-point product than a luxury watch or such.”

Don’t miss: Fashion logos are trendier than ever — don’t let them ruin your finances

Kering boasts brands, including Gucci and Balenciaga, that are showing real power, the analyst argues. “The brand heat is so strong that you hope they could still gain market share, even in a slower market,” Brand says, adding that Louis Vuitton parent LVMH has developed one of the sector’s best brand portfolios, too. UBS has Buy ratings on Kering and LVMH, along with price targets that imply rallies of about 25% and 15%, respectively.

The bank has sounded somewhat cautious on the sector recently, as trade-war fears have persisted. An all-out trade war could trigger a 30% slide in some European luxury stocks, it reckons. In this situation, which UBS views as an unlikely worst-case scenario, global gross domestic product growth would slide by one percentage point, and worldwide stock markets would dive by more than 20%. That would hurt both the wealth effect—the tendency of individuals to spend more when their investments are doing well—and consumer confidence.

See: European luxury stocks face a 30% drop in an all-out trade war

Other banks also have sounded skittish toward the sector. “Europe’s most emblematic and successful current counterpart of America’s Nasdaq universe is its luxury goods companies,” wrote Kepler Cheuvreux strategist Christopher Potts in a recent note. “Accordingly, we are reducing our exposure to these stocks because they have become expensive and over-popular.”

Burberry Group
BRBY, -1.59%
 , Salvatore Ferragamo
SFER, -1.47%
 , and Swatch Group
UHR, -0.73%
could face the biggest losses, according to UBS. Burberry and Ferragamo might be particularly vulnerable because the trade conflicts have erupted as they have been trying to regain momentum with consumers, Brand notes.

“If we were to see the real weakness in terms of trade wars, I think it’s more difficult to turn around a brand with that backdrop,” she says. Meanwhile, Swatch would be hamstrung by its big exposure to Chinese shoppers and its relatively cyclical business, with steep fixed production costs.

In addition, the luxury sector’s stocks are trading at a higher-than-usual premium to the broad market—roughly 70%, versus a historic average around 40%—Brand and her colleagues note. Burberry and Ferragamo look especially expensive, fetching 28 and 32 times forward-year estimated earnings, respectively, compared with the Stoxx Europe 600 benchmark’s
SXXP, -0.49%
 14.

The other players don’t have valuations that are quite as lofty, but they’re not cheap. Kering and Swatch change hands at 21 times expected forward-year profits, while LVMH’s multiple is 23.

Now read: Handbag sales help carry Coach brand back to “full health”

This report also appears at barrons.com.



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