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Weekly Review - April 17, 2017

Weekly Review - April 17, 2017

Website Administrator - Monday, April 17, 2017

Summary

Economic data for the week consisted of unsurprisingly weaker retail sales, lower inflation readings via the consumer price index and producer price index, as well as continued strength in labor markets.

Equity markets lost ground in the U.S. for the most part, while developed and emerging foreign markets generally were flattish. Bonds fared well in that anti-risk environment, as did real estate, while commodity indexes also gained with help from higher crude oil and gold prices.

Economic Notes

(0) Retail sales for March fell -0.2%, which was on target with forecast. The core retail sales number, by contrast, rose +0.5%, which was a few tenths better than expected; however, prior month results were revised downward a bit. The headline figure was driven by drops in motor vehicle sales, the price of gasoline and building materials, each down by 1-2%. Core was driven higher by strength in electronics and clothing, as well as food/beverage sales. There appeared to be some weather effects generally that contributed to results in several categories.

(0) The producer price index for March fell -0.1% on a headline level and came in flat for core, both of which were a little softer than expected. Lower energy prices were responsible for pulling down the results, while higher food prices offset that effect somewhat. Over the past year, prices have firmed for crude materials especially, reflecting a recovery in commodity prices over the period since last February.

(0) The March consumer price index declined -0.3% on a headline and -0.1% on a core basis; like PPI, these were also a bit below expectations. Aside from the energy category falling -6%, affecting headline results, the core group was most heavily affected by a decline in the communications category, interestingly, due to a drag in certain cellphone plans and related 'quality' adjustments (another complex topic when dealing with inflation readings). Also, new and used vehicle prices fell, as well as apparel and lodging, while transportation costs rose.

Year-over-year, headline and core CPI gained by +2.4% and +2.0% respectively—with energy commodities up +20%, coupled with gains in medical care and shelter—bringing results to near the Fed's target inflation levels. However, the Fed has adjusted its language to allow for 'symmetrical' deviations from their 2% target—implying at this point that they'll likely let inflation run higher for a time to both ensure the economy gains stronger footing and to compensate for the substantial below-2% period. Economists continue to debate what this really means.

(+) Import prices for March fell -0.2%, which was target with expectations. Excluding fuels, the index gained +0.2%, which implies the underlying -4% drop in petroleum prices during the month, while prices for industrial supplies in other areas gained +2%.

(+) The preliminary Univ. of Michigan index of consumer sentiment rose +1.1 points to 98.0, above the expected drop to 96.5, again very close to the recovery high set earlier this year. Consumer assessments of current conditions led the way, up a few points, while future expectations also rose slightly. Expectations for inflation in the coming year were flat at +2.5%, as were those for the next 5-10 years at +2.4%. Generally, these sentiment and inflation perceptions reflect short-term goings-on, such as equity market volatility or gasoline prices (the latter being a primary driver, as more Americans drive than own stocks for the most part).

(+) The government JOLTs job opening report for February showed a stronger-than-expected gain to 5,743k, compared to the 5,650k consensus estimate. The rate of openings moved up a tenth to 3.8%, while the rates for hiring and quits each ticked downward a tenth to, respectively, 3.6% and 2.1%; the layoff rate was flat at 1.1%. In keeping with trend, these results continue to register strong labor readings.

(0/+) Initial jobless claims for the Apr. 8 ending week fell by -1k to 234k, below a forecasted level of 245k. Continuing claims for the Apr. 1 week fell by -7k to 2,028k, which was a bit above the 2,024k expected. No unusual issues were noted by the DOL, and overall levels remain low, implying a strong labor environment with minimal layoff activity.

Market Notes

Period ending 4/14/2017

1 Week (%)

YTD (%)

DJIA

-0.98

4.18

 

S&P 500

-1.11

4.64

Russell 2000

-1.40

-0.51

MSCI-EAFE

0.04

6.58

MSCI-EM

0.13

11.66

BarCap U.S. Aggregate

0.76

1.75

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

4/7/2017

0.82

1.29

1.92

2.38

3.00

4/14/2017

0.81

1.21

1.77

2.24

2.89

On a shortened Good Friday holiday week, U.S. stocks slipped a bit with geopolitical concerns, including U.S./Russian relations over Syria in the aftermath of a missile strike, North Korean tensions which involve the Chinese, as well the surprise news of the largest non-nuclear bomb in the U.S. arsenal deployed in Afghanistan. Domestically, Trump's comments that the dollar was getting 'too strong' and hoped that the Fed would keep interest rates low, weighed on markets somewhat. Typically, Presidents have not tended to weigh in on either matter, especially in regard to Fed policy. Several of these wildcards have added to market uncertainty, which can lead to more volatility.

From a sector perspective, consumer staples and utilities ended the week as the only positively-performing areas, while financials and materials suffered the most severe declines, at close to -3%.

Foreign equities were mixed on the week, with negative returns in Europe, Japan and the emerging markets translating to flattish to slightly-positive results on net with accompanied by a weaker dollar for the abbreviated week. Trump's comments about the strong dollar didn't help sentiment, while influences were similar to those in the U.S., including a pareback in the financial sector as rates fell. The upcoming first round of the French election on Sun., Apr. 23, appears to weigh on investors as well, with a far-left Bernie Sanders-like candidate gaining ground against the more centrist candidates just when the far-right populist candidate was losing ground. The candidates at both extremes are less pro-euro than the centrists, which explains the market volatility surrounding polling results. Brazil and Russia were the laggards that pulled down EM returns generally.

U.S. bonds experienced a positive week, contrary to the equity sell-off and risk-off flows. Rates fell across the curve, the 10-year note's yield to a 5-month low. This resulted in outperformance for long treasuries, but also positive returns for investment-grade debt in general. High yield corporates and floating rate bank loans were generally flat on the week. Foreign bonds experienced similar themes, with a flight to quality effect seeing assets move toward government bonds in the U.K., Japan and Australia, while European bonds were mixed due to the election uncertainty. One measure of this concern—the yield spread between France and Germany (France being the 'higher yield' credit)—has moved from about a quarter-percent last fall to touching a half-percent recently.

Real estate bucked the trend of equity losses by gaining a percent in the U.S., and more internationally, with help from a weaker dollar. Retail, industrial and office REITs all led the way, while apartments have pulled back somewhat in the wake of rental rates stabilizing around the country due to supply growing to meet demand.

Commodities generally gained for the week, on the back of crude oil and a weaker dollar. West Texas crude rose +2% to end the week at $53.20. Precious metals also gained on the Middle East geopolitical concerns and decline in interest rates; industrial metals, on the other hand, declined.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for April 10, 2017.

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