Stocks rose and closed near session highs yesterday reversing a late day selloff on Tuesday in front of the 4th of July holiday.

The release of the most recent FOMC minutes showed that, despite some reservations about risks associated with tariffs, our economy is strong and a September rate increase is expected by many. The ADP forecast for June employment growth was slightly below expectations but within range. The actual report will come out later this morning.

Today, the U.S. has begun implementing tariffs on billions of dollars of Chinese goods. China quickly retaliated. There is little doubt that this time around, there will be quite a bit of anecdotal pain, particularly within the auto and farming industries. But overall, this still doesn’t qualify as an all-out trade war. We are talking about $34 billion in tariffs against U.S. GDP zeroing in on $2 trillion. Yet that doesn’t mean they are inconsequential. What we all have to watch is the intensity of the reaction, not the normal batch of perma-demonstrators we see in the streets after other Trump actions, but the real life angst and pushback, particularly within Trump’s core supporters, who might be hurt economically by the new tariffs.

If there is good news, it appears European auto manufacturers are ready to talk about lowering or wiping out tariffs they impose on U.S. cars. Negotiations are never simple but clearly there is some movement. European auto company stocks rose yesterday on the news and helped to ignite a rally on Wall Street. But leadership yesterday came form the defensive stocks including health care (despite more Trump threats about drug prices), consumer staples and REITs. Energy was weak, again related to Trump tweets. Tech stocks rebounded, especially semiconductor stocks that have been very weak recently related to tariff threats. Futures in front of the employment report news are down slightly but, given that the tariffs were widely expected, markets are not likely to fall further unless the reaction, both real and in the media, are more extreme than expected.

Speaking of the employment report, gains of 150,000-200,000 are expected. Observers will pay close attention to the rate of wage increases. It was 2.7% in May. Any spike will raise fears that we will get four, not three, Federal Funds rate increases this year despite tariff fears and a flattening yield curve. Also watch the labor participation rate. Demographics help to push it down. There are more baby boomers retiring than young Americans entering the work force. But there are also part-time or unemployed Americans who see greater opportunity today in a world where there are more jobs available than people unemployed.

Within the market, as we roll into earnings season, there are several things to watch. As I have mentioned before, with most companies on the sidelines embargoed from executing stock buyback programs until second quarter earnings are reported, there is a slight negative bias to the markets. But, as least for the past couple of weeks, despite the beginning of a tariff battle between the U.S. and China, stocks have been holding their own. One should remember that earnings, interest rates, and the dollar are the three most important factors affecting stock prices. Earnings are going to be very good although forward guidance will likely be tempered for many companies due to trade uncertainty. That has helped to buttress the defensive stocks. There are no tariffs on drugs and people all over the world are still going to use soap and laundry detergent. As for interest rates, after crossing the 3.0% barrier, rates on the 10-year Treasury have paused and now sit below 2.85%. The dollar has also remained within a narrow range in 2

recent weeks falling slightly as the tariff deadline neared. Internationally, tensions continue high in Europe and a near term focus is on Brexit negotiations which have been problematic so far.

While earnings season is still 1-2 weeks away for most, there have been a few companies that have reported. In general, market reaction has been muted. Without a strong “beat and raise” quarter, stocks have generally remained flat or even declined on the results. Analysts seem to have underestimated the impact of the rising dollar on earnings of multi-national companies. Companies with currency related earnings misses have been punished more than one might expect. First quarter results were helped strongly as a result of year-over-year weakness in the dollar but in the second quarter the year-over-year change has been negligible-to-negative.

While stocks could move a bit this morning in response to the employment report, it is a summer Friday with more than the usual number of traders already headed to the beach courtesy of the mid-week holiday. Unexpected news can have a larger than expected impact in a thin market but the most likely outcome today is relative quiet. Last month, President Trump broke tradition by leaking a strong earnings report before the actual release. He was widely criticized for doing that. So far, this morning he has said nothing. Does that mean he has listened or does that mean the numbers aren’t anything to crow about? By the time you read this newsletter, you will have the answer.

Today, Kevin Hart is 38. Rapper 50 Cent is 42. Maybe we should call him 42 Cent. Former President George W. Bush is 71 along with Sylvester Stallone. Finally, the Dalai Lama turns 82.

James M. Meyer, CFA 610-260-2220

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