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Weekly Review - April 24, 2017

Weekly Review - April 24, 2017

Guest Post - Monday, April 24, 2017

Summary

Economic data for the week showed slower but still-strong results in regional manufacturing and production, while housing metrics were mixed.

Stock markets gained globally, led by the U.S. and Japan, while other markets generally came in flatter. Bond returns were flattest of all, with minimal changes in interest rates for the week. Commodities lost ground along with oil prices declining due to higher supplies

Economic Notes

(0) The April Empire State manufacturing index declined sharply by over -10 points to +5.2, especially compared to a forecasted +15.0 reading, but remained in expansion mode. For the month, new orders fell backward by -15 points (while remaining in expansion), while shipments and employment both improved by several points to further expansion.

(0/+) The Philly Fed manufacturing survey for April showed strong growth, but at a slower pace of +22.0, compared to +32.8 last month and an expected +25.5 for this month. New orders and shipments both declined significantly from the prior month, but remained at very high levels of expansion, while employment moved up, further into expansion. The overall index change was akin to 'unsustainably strong' to 'very strong' on the manufacturing front.

(0) Industrial production for March rose +0.5%, which was as expected. However, the overall measure was led by a +9% rise in utilities, which were helped by colder weather during the month compared to the prior two. The key manufacturing production component, however, fell -0.4%, relative to an expected flat reading, as the auto/auto parts segment declined by several percent, although other areas such as business equipment declined as well. Capacity utilization rose by almost a half-percent to 76.1%, due to the utilities contribution.

(+) Existing home sales for March rose +4.4% to a seasonally-adjusted annualized 5.71 mil. units, surpassing consensus estimates calling for +2.2% and recovering from a drop the prior month. Both single-family and condos/co-ops gained in a similar magnitude. Regionally, the Northeast and Midwest rose in the +10% range, while the West declined a bit. By several measures, it appears that lower available inventories are holding back growth levels somewhat.

(-) Housing starts for March declined by -6.8% to 1,215k, which came in low relative to the -3.0% decline expected. Single-family starts fell -6%, while multi-family dropped -8%. From a regional standpoint, the Midwest and West were the worst performers, falling -16% each, while starts in the Northeast rose +13%. Building permits, by contrast, rose +3.6%, beating the consensus expectation of +2.8%. Here, single-family permits fell -1%, which were overwhelmed by the rise of +14% in multi-family. Overall, it appeared that that weather-related effects could have played a key role for the period, aside from the penchant for month-to-month volatility in housing figures generally, particularly on the multi-family end.

(-) The NAHB homebuilder index for March fell by -3 points to 68, further than the expected decline to 70; however, this is still an elevated level from a broader post-crisis standpoint. Under the hood, current sales, future sales and prospective buyer traffic all declined. Regionally, the West region surpassed the others by being unchanged, while the others declined by several points. The primary value of this index is its use in predicting housing starts—economists have been continuing to diagnose the issues being the lag in starts versus long-term 'normal' levels, which have been blamed on house prices, demographics, sub-par employment and wages, student loan debt and slow family formation.

(x) The Conference Board index of leading economic indicators for March rose +0.4%, which marked several months in a row of gains. Monthly results were led by strength in new manufacturing orders and the interest rate spread. The coincident and lagging indicators were +0.2% higher and flat, respectively. For the trailing six months, leading indicators rose at a +4.9% annualized rate, beating its gain of +1.1% over the six prior months, while the other two indicators also showed steady growth for recent period. While these indexes consist of data we already know, patterns remain in a positive growth trajectory.

The Conference Board index of leading economic indicators for March

(0) Initial jobless claims for the Apr. 15 ending week rose by +10k to 244k, which was just above the 244k expected. Continuing claims for the Apr. 8 week fell by -49k to 1,979k, which was below the 2,024k level expected. Initial claims remain near lows for the cycle, with lower claims also coming from states with heavy energy production, in line with higher oil prices and rig count ramp ups.

(0/+) The Fed's beige book, which highlighted regional economic conditions for the mid-Feb. to early March timeframe, showed continued growth in the modest-to-moderate range for all districts. Manufacturing, including the energy segment, saw expansion, although there were some concerns about trade policy effects in a few districts. Consumer activity was mixed a bit, as travel and auto sales picked up, but housing sales fell, in contrast to a rise in construction and lending volumes. From an employment standpoint, labor conditions saw tightening, with demand higher for certain skill positions.

Market Notes

Period ending 4/21/2017

1 Week (%)

YTD (%)

DJIA

0.51

4.71

 

S&P 500

0.87

5.54

Russell 2000

2.58

2.06

MSCI-EAFE

0.22

6.68

MSCI-EM

0.14

11.54

BarCap U.S. Aggregate

0.00

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

4/14/2017

0.81

1.21

1.77

2.24

2.89

4/21/2017

0.79

1.20

1.77

2.24

2.89

Equities ended the week a bit higher, despite volatility and earnings disappointments from a variety of Dow Jones Industrial Average components, including IBM and Johnson & Johnson. Additionally, continued speculation about tax reform weighed on sentiment. Consumer cyclicals and industrials led the way with the strongest gains, while energy lost the most ground along with lower oil prices. Earnings overall, though, have improved, with EPS growth for the S&P expected to be up 8-10% on a year-over-year basis, largely based on a recovery in energy earnings, although other sectors have been decent as well.

We didn't want to get to this point/topic again, but the next political theater is the potential government shutdown if a new spending bill isn't wrapped up by Fri., April 28, although the odds of this occurring still remain relatively low. A greater chance seems likely at the end of September, when the fiscal year ends and the debt ceiling needs to again be lifted.

Foreign stocks ended with Europe in the negative for the week, with uncertainly surrounding the French elections on Sunday (which resulted in an early May run-off between mainstream Macron and populist LePen), as well as a Paris terrorist attack late in the week. Polls continue to favor Macron at this point, but as know, polls have been notoriously off-base from time to time in recent elections. Naturally, a more conventional pro-Eurozone candidate would be more appealing for investment markets relative to the uncertainty an anti-Euro populist would offer (and threats of a 'Frexit'). Japan experienced decent gains for the week due to stronger export growth and improvements in manufacturing sentiment; any signs of economic life are seen at positively as they've been fleeting.

British stocks also suffered in local terms, as British prime minister May called for a general election in early June, earlier than planned, in an effort to shake up the political gridlock that has been hampering ironing out of the Brexit process. While this sounds dramatic, this is much more common in Britain than our standard election schedule every 2-4 years.

Emerging markets fared just slightly in the positive on net, with most crosscurrents canceling each other out. Turkey was one of the best performers on the back of a controversial referendum win for Pres. Erdogan that has resulted in more concentrated power. Contrary to what policy analysts and human rights activists may applaud, authoritarian regimes have interestingly been favored by markets in many cases due to the perception of greater 'stability' such regimes provide for foreign investors.

Bonds experienced one of their flattish weeks in some time, with minimal changes in interest rates. High yield performed slightly better, by just a few basis points. Foreign bonds were similarly flattish in local terms, but performed slightly better when a weaker dollar was included.

Commodity indexes lost ground a bit on the week, with declines in energy, industrial metals and several agricultural contracts. The price of crude oil from $53.20 to again below the critical $50 threshold at $49.60, with reports of continued high supplies. Crude continues to trade in a band of $45-55/barrel, which is a range in place since November.

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 17, 2017.

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