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US equity markets held up relatively well this month despite several economic hurdles. The escalation of the trade war, the slump in economic growth forecasts and the inverted yield curve have all increased stock market volatility.
Despite everything, the broad S & P 500 (SPY) index is down only 1.8% in August. The obvious strength of the consumer sector in the United States is one of the factors explaining its stability. The retail sector rebounded in July, leading to a market rally last week. Consumption accounts for two-thirds of the economy and the strength of retail sales shows that consumer confidence remains strong.
On Wednesday, August 21, S & P 500 futures contracts rose 0.88% after strong earnings growth in the retail sector. Despite all the volatility, the S & P 500 index still displays an impressive 16.7% rise for the year.
Strong Target and Lowe Revenues Boost Inventory
The Target Action (TGT) rose more than 12% after the retail giant published quarterly earnings above expectations. Target's same-store sales increased 3.4% year-over-year, exceeding Wall Street's 2.9% year-on-year expectations.
Lowe's home improvement company (LOW) also jumped 12% after posting better-than-expected results. Lowe's US comparable store sales increased 3.2% year-over-year, and its profits increased 10% year-over-year.
These results indicate that the retail sector in the United States is doing well. However, consumer sentiment may have taken a turn in August after the intensification of the trade war between the two countries.
The economy is solid, but the trade war is a headwind
Although the consumer sector in the United States remains in a decent form, there are signs that the economy is slowing. US GDP increased 2.1% in the second quarter, down from 3.1% growth in the first quarter.
This slowdown results from the deceleration of export-oriented sectors. The trade war between the United States and China is the main obstacle to the economy. In our opinion, unless a trade agreement is concluded between the two countries, the economy is about to slow down further. For the moment, retail sales data indicate that the US economy is not heading for a recession, at least not in the immediate future.
In the minutes of the Fed's July meeting, investors will look for signs of future rate cuts. Markets are expecting a rate cut in September and another by the end of the year.
Easy monetary policy has boosted US equity markets significantly this year, as well as for most of this decade. However, after a while, an ultra-easy monetary policy can be dangerous for the economy.
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