US-Mexico Trade Deal Seems to Continue to Boost Stock Market Sentiment

The U.S. equity market may be this year’s summer sleeper hit.  If you’re like many summertime investors, having spent some time away from the hustle and bustle, you might be surprised to see that, amid the geopolitical tensions, trade worries, and interest rate uncertainty, the market has been steadily knocking out solid gains. And now we find ourselves once again in record territory. 

Enthusiasm about a trade deal between the United States and Mexico seemed to spill over into a second day Tuesday, a day after news of an agreement appeared to lessen worries over the administration’s trade policies.

Recently, trade disputes between the U.S. and key trading partners have apparently caused some investors to worry about the pace of global economic growth. While it still remains to be seen how the issues could work out between the U.S. and China, the European Union and Canada, enthusiasm about the Mexico deal appeared to help stocks on Monday. 

Index Roundup

All three major U.S indices ended in the green Monday, with the S&P 500 (SPX) and Nasdaq Composite (COMP) closing at records. The tech-heavy COMP traded above 8,000 for the first time. According to the Wall Street Journal, it took the COMP a little less than eight months to rally from the 7,000 mark, making the 1,000-point sprint the fastest since the index went from 4,000 to 5,000 near the height of the dot-com era.

The Dow Jones Industrial Average ($DJI) outperformed the other two indices, perhaps because of its concentration of large multinational blue chips that are more sensitive to international trade issues than domestic small-cap stocks. $DJI has been lagging the other two indices, with market experts blaming trade as a factor.

Risk Appetite Rises

With the trade news seeming to blunt some worries Monday, the dollar fell against a basket of currencies and the yield on U.S. Treasuries rose. Both are often considered haven investments and demand can fall in times when investors are more optimistic. (Treasury yields move opposite to their prices.) While the Cboe Volatility Index (VIX), often considered the market’s fear index, rose, it still finished at a relatively subdued level just over 12 (see figure 1 below).  

The bullish sentiment on the U.S.-Mexico trade front comes on the heels of Fed Chairman Jerome Powell’s comments in Jackson Hole on Friday. The market seemed to interpret them as dovish, especially a bit about him not seeing much risk of the economy “overheating” as far as inflation goes.

Consumers Swiping

Over the last year, the financial sector of the S&P 500 has only trailed the broader index just a bit, with the sector up 14.1 percent and the index up 17.62 percent. While financial stocks aren’t the best performing sector, they’re not the worst either. But there’s one segment of the sector that has markedly outperformed the wider index—credit card companies. Over the same time period, American Express Company AXP is up more than 25 percent, Visa Inc. V is up more than 40 percent, and Mastercard Inc. MA is up nearly 60 percent. One reason for the divergence could be that banks appear to have been weighed down by a flattening yield curve. At the same time, recent data and company earnings reports appear to be showing that the U.S. consumer is healthy, indicating shoppers may be swiping those cards. 

Utilities Cool Off

With the stock market reaching new highs, it’s perhaps not surprising that some defensive sectors are doing poorly. Investors often buy into these sectors when they’re worried about an economic downturn because people will still need to buy things like toothpaste and electricity regardless of what the economy is doing. So, when investors are more confident about economic growth and the rise in share prices that can come with it for some sectors, they tend to eschew defensive sectors. On Monday, utilities was the worst performing sector in the S&P 500, losing 0.64 percent. The sector is down 2.27 percent over the past year, while the wider index is up more than 17 percent. Another apparent headwind for utilities on Monday was the rise in Treasury yields. Dividend-paying utilities often compete with fixed income as investors seek yield.

GDP Data on Tap

The government gets another crack at gross domestic product on Wednesday with its second estimate for Q2 GDP. Investors tend to keep a close eye on GDP reports, as they can give insight into the pace of economic growth (or contraction) and shed light on the state of inflation (if there is any). That’s the idea behind the government’s GDP estimates in general. More specifically, the report this week is expected to show annualized GDP growth of 4 percent, according to a consensus of economists polled by Briefing.com. That would be a slight revision down from the last estimate of 4.1 percent. A surprise revision any lower has the potential to weigh on the markets because it would take the estimate below the 4 percent threshold, which could be a psychologically important level.

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