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Weekly Review - April 3, 2017

Weekly Review - April 3, 2017

Guest Post - Monday, April 03, 2017

Summary

Economic data for the week was highlighted by stronger manufacturing and housing results, an improvement in consumer confidence to a multi-decade high, while Q4 GDP was revised slightly higher than in earlier releases.

Equity markets in the U.S. gained, developed markets ended flattish on net and emerging markets lost ground. The majority of bond indexes were flattish, with very little interest rate movement, while commodity indexes gained generally with a bounce higher in crude oil prices.

Economic Notes

(+/0) The final result for Q4 GDP showed a revision higher of +0.2% to an annualized +2.1%, which was a tenth higher than expected. Real consumer spending growth was the primary component of the upgrade, with inventories being another contributor. These were offset a bit by lower private fixed investment, government spending and exports. Core PCE inflation was raised a tenth of a percent to a rate of +1.3% for the quarter, although the year-over-year change was unchanged at +1.7%. This information is now old news, suitable for the archives, with no major changes that appear to affect the current quarter drastically—growth for Q1 is expected to be in the +0.5 to +1.5% or so range, based on a variety of estimates, including various economists and the Atlanta Fed, which publishes a ‘real time’ indicator known as GDPNow, intended to improve the speed and accuracy of economic growth data.

(0) For February, personal income came in with a +0.4% month-over-month gain, on par with expectations, and driven by nominal wage/salary growth. Personal spending rose +0.1%, about half the growth expected, but some prior months were revised higher. The PCE headline and core price indexes rose +0.1% and +0.2%. Year-over-year, this translated to PCE inflation of +2.1% and +1.8% for headline and core, respectively, which is well within the Fed’s target midpoint of 2%—it’s the first time headline PCE has moved above that level in 5 years.

(+) The Chicago PMI release for March showed slight improvement of +0.3 points to 57.7, which marks the best result in two years. The result was led by gains in new orders and production, as well as inventories. The only key component that disappointed was employment, which fell back below 50 into contractionary territory. Anecdotally, over half respondents expected new orders for Q2 to surpass Q1 levels, which is more optimistic than a year ago at this time.

(+) The S&P/Case Shiller home price index for January showed a rise of +0.9%, beating forecasts calling for +0.7%. All 20 cities except Cleveland experienced gains for the month, with Seattle and Chicago leading the way. Year-over-year, the increase remained solid at a pace of +5.7%.

(+) Pending home sales for February rose +5.5%, representing a bounceback of January’s decline and surpassing expectations of a +2.5% increase. All regions showed positive results, led by the Midwest with a +11% gain for the period. Less severe-than-normal late winter weather may have played a role in the strong results, which have a tendency to carry over into actual closings within a few months as they become ‘existing’ home sales.

(0) The final March Univ. of Michigan consumer sentiment index declined a fraction of a point to 96.9, below the expectations for an unchanged 97.6, but levels overall remain high. Assessments of current conditions were the primary culprit on the downside, while expectations for the future ticked down just slightly. Inflation expectations for the next year rose a tenth of a percent to +2.5%, while those for the next 5-10 years ticked up by +0.2% to +2.4%; both of these readings remain within normal ranges with shorter-term fluctuations based on items such as gasoline prices.

(+) The index of consumer confidence for March rose almost +10 points to 125.6, far above expectations calling for 114, and a 16-year high. Consumer assessments of both present economic conditions and expectations for the future were both higher, in line with the broader index; as did the labor differential that measures the ease of finding employment. Obviously, such a result is positive from a consumer sentiment standpoint; interestingly, it has only been at this level twice in the last 50 years—during the late ‘60’s and the tech boom of the late ‘90’s.

(-) Initial jobless claims for the Mar. 25 ending week fell by -3k to 258k, but still remained above the expected 247k. Continuing claims for the Mar. 18 week rose +65k to 2,052k, which was above the expected 2,031k. It appears that claims levels continued to be affected by the winter storm, based on the states involved, which tends to be a temporary phenomenon. Levels overall remain very low.

Market Notes

Period ending 3/31/2017

1 Week (%)

YTD (%)

DJIA

0.32

5.19

S&P 500

0.82

6.07

Russell 2000

2.37

2.47

MSCI-EAFE

0.00

7.25

MSCI-EM

-1.11

11.14

BlmbgBarcl U.S. Aggregate

0.07

0.82

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

3/24/2017

0.78

1.26

1.93

2.40

3.00

3/31/2017

0.76

1.27

1.93

2.40

3.02

U.S. stocks gained on the week, with small caps sharply outperforming large caps. From a sector standpoint, energy recovered along with gains in oil prices, followed by consumer cyclicals; conversely, defensive sectors utilities and telecom experienced lost the most ground on the week. Now that we’ve entered April, the focus will likely turn to Q1 earnings, in addition the legislative success of the Trump agenda that’s dominated sentiment over the last few weeks. Large-cap stocks, and particularly ‘growth’ sectors, fared well in during the first quarter, outperforming weaker cyclical sectors such as energy, as well as the mid- and small-cap groups.

Foreign stocks were flattish on net in developed markets, with results hampered by a stronger dollar during the week. Returns were positive in Europe as sentiment continued to improve due to slightly stronger economic and business fundamentals, flat in the U.K., while Japan lost ground in conjunction with a poor retail sales report. Emerging markets also declined, in contrast to their pattern so far this year, as India gained but Russia and China fell back. South Africa experienced an especially poor week, as the finance minister was removed from the nation’s cabinet. In the 1st quarter, foreign stocks were the shining stars of the asset class universe, outgaining all other groups—in a welcome change of equity market leadership. Emerging markets outperformed developed markets, as lower valuations and anticipated bottoming of fundamentals spurred investor flows.

U.S. bonds on the investment-grade side were little changed on the week, as interest rates were flat along the yield curve. High yield bonds, however, gained ground in line with stronger oil prices, and bank loans gained a bit more ground than conventional debt. Foreign bonds in developed markets gained a bit in local terms due to lower inflation readings, which lowered yields, ended up lagging overall due to a stronger dollar, which was even more evident in emerging markets. During the first quarter, bonds were plagued by uncertainty surrounding interest rates and eventual Fed action. This ultimately led to corporate credit outperforming government debt, with especially strong results from high yield and floating rate bank loans, compared to the broad Bloomberg Barclays U.S. Aggregate index.

Real estate in the U.S. gained generally on par with broader equities, while foreign names were negatively affected by a stronger dollar somewhat. Mortgage and lodging REITs continued their lead, while residential pared back. The losing group of the quarter was retail/regional malls, which we’ve talked much about.

Commodity indexes rose last week. West Texas crude rose +5% from $48 to $50.60, helping to drive the energy component higher, as inventories grew at a slower rate than expected and expectations persisted that OPEC would extend their policy of production cuts. Metals also gained ground, despite a stronger dollar, while the agricultural segment was the only loser for the week, mostly due to a decline in the prices of soybeans and sugar. In the quarter, commodity indexes lost ground, but mostly due to the negative prices influences of crude oil and natural gas, which are larger components. Metals, both industrial and precious, fared quite well so far in 2017, while agricultural contracts were mixed and largely weather- and region-dependent, per usual.

We will forward along a copy of our quarterly asset class summary report during the next week or so, which highlights portfolio results in greater detail.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management. 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 March 27, 2017.

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