Weighing The Week Ahead: Will The North Korea Threat Be The Catalyst For A Market Correction?

In a normal, quiet summer week we would be lazily considering consumer confidence and the Fed minutes. Instead, the escalating war of words between the U.S. and North Korea has claimed the agenda. Expect many to be asking,

Will the North Korea threat be the catalyst for a market correction?

Last Week Recap

My notion that last week would feature a discussion of revised price targets was pretty good — for exactly one day. Global tensions claimed the attention of markets. Anyone looking for a reason to sell suddenly had one. This occurred despite good earnings and generally positive economic data.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. She notes the overall decline of 1.43% for the week. With Thursday’s big decline, the sequence of down days, and the accompanying headlines, it probably seemed like more.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. Last week’s deserving winner was Aaron Brown for an excellent analysis of the need for context in reading chart. The article also has a link to past winners and their work. I have another great candidate in mind. I hope that readers and past winners will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

The economic news last week was generally positive. 

The Good

  • Mortgage delinquencies are at a ten-year low. (Calculated Risk).
  • JOLTS report shows continuing strength in the labor market. This is not the best way to estimate overall job growth, although that is the typical interpretation. More importantly, check out the quits rate, (Washington Center for Equitable Growth).

And also, the Beveridge Curve, an indicator of where we are in the business cycle. (BLS)

  • Wholesale inventories were slightly higher than expected. The skeptical Steven Hansen (GEI) notes the decrease in the moving average and the recessionary level of the overall series.
  • Commercial real estate remains strong. (Scott Grannis).

  • Inflation remained tame on both the wholesale and retail fronts. Once again, not all regard this as good news, but it meets our definition.
  • Productivity for Q2 rebounded nicely with a gain of 0.9%.
  • Small Business optimism increased again, continuing the post-election surge. (Calculated Risk).
  • Q2 earnings continue to beat expectations, now growing at 10.1%. This is substantially better than expected at the end of the quarter (6.4%) or the start of the quarter (8.6%). (FactSet).
  • Corporate executives see good conditions. These include a reasonable macro outlook, profit rebound despite sluggish GDP and DC gridlock, and low inventories (requiring restocking). (Avondale report on conference calls).

The Bad

  • Rail data were mixed. Steven Hansen (GEI) cuts through the noise in the report with analysis of the “economically intuitive” data and the 4-week moving average.

The Ugly

Financial illiteracy. My readers can answer these three questions, but 70% of Americans cannot.

Noteworthy

In our office, we enjoyed guessing the richest person in various states – getting past the obvious choice in Nebraska and Washington! The Visual Capitalist has something interesting almost every day.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that. Second best is planning what to look for and how to react.

The Calendar

It is an active economic calendar. I continue to emphasize housing starts and building permits. Retail sales need a rebound – as expected. I do not pay much attention to the leading indicator release, but some swear by it. Several other releases have an impact on GDP calculations.

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