Weekly Market Update

Market Update: US Government Shutdown Amidst Tariff Concerns

The US government shuts down for the first time in seven years, investors are bracing themselves for a potentially perilous time for the economy. Despite the uncertainty, stocks edged higher on Tuesday and Wednesday, with the Dow Jones Industrial Average notching a fresh closing record.

In related news, President Trump sent out a fresh flurry of tariffs on lumber, timber, and certain types of furniture late Monday, hot on the heels of a threat of levies on foreign-made movies and last week's plan to put 100% duties on branded drugs. Concerns are growing about the impact on the global economy from Trump's ever-expanding trade offensive

Valuation Metrics: Are Stocks Overvalued?

Various valuation metrics suggest the stock market is expensive, implying weak returns in the years to come. However, a closer look at these metrics reveals their limitations and potential biases. For example, Shiller's CAPE ratio is based on average earnings over the past 10 years, which may not accurately reflect current or future earnings.

Macro Crosscurrents: Mixed Signals

Our review of macroeconomic data reveals a mix of positive and negative signals. On the positive side:
• Inflation heats up, with the PCE price index rising to 2.7% in August.
• Consumer spending ticks higher, with personal consumption expenditures increasing by 0.3% month-over-month in August.
• Business investment activity improves, with orders for nondefense capital goods excluding aircraft increasing 0.6% to $76.7 billion in August.

On the negative side:
• Unemployment claims fall, but total ongoing claims remain elevated.
• Card spending data is holding up, but may be inflated due to tariffs.
• Gas prices decline, but energy price volatility remains a concern.
• Consumer confidence ticks lower, with sentiment decreasing across various groups.
• Mortgage rates tick higher, which may impact housing market activity.

Conclusion

The US government shutdown and Trump's tariff blitz are likely to have significant implications for the economy and stock market.