The H Group Blog

Investment and Financial Planning news from some of the best in the business.

Weekly Review - April 30, 2018

Weekly Review - April 30, 2018

Guest Post - Monday, April 30, 2018

Summary

Economic data for the week featured GDP for the first quarter coming in a bit better than expected, as were durable goods orders. In housing, home prices continued to rise, and home sales came in stronger than expected. Consumer sentiment/confidence also improved, as did jobless claims to multi-decade low levels.

Equity markets were flattish to negative in the U.S., while positive results abroad were depressed by a stronger dollar. Traditional bonds were mixed as interest rates ticked higher before retreating. Commodities were also mixed as industrial and precious metals lost significant ground.

Economic Notes

(+) The first edition of Q1 GDP came in showing a gain of +2.3%, stronger than the +2.0% increase expected, especially considering the pattern of weaker first quarter results in recent years, largely thought to be the result of seasonal adjustment factors. Interestingly, estimates for GDP this last quarter ranged as high as over 5% early in the year, to a steady decline to under 2%, before the preliminary results were released. Under the hood, consumer spending declined dramatically from the prior quarter (from a +4.0% rate to +1.1%), as did business equipment, while inventories and foreign trade contributed to growth. Interestingly, private domestic demand declined to its slowest pace in a few years, as housing growth also declined. Strength was seen in ‘non-residential structures’, which includes a sharp increase in mining/energy exploration.

In the other stats, Q1 personal consumption rose +1.1% for the quarter, and core PCE rose at a rate of +2.5%—each on target with forecast. The employment cost index rose +0.8% for the period, which was a tenth of a percent stronger than expected, and reaching a cycle high, while wage growth came in +2.7% year-over-year, in line with a steady tick upward.

(0) Durable goods orders rose +2.6% in March, beating forecast expectations calling for +1.6%. The underlying number was led by a +45% in non-defense aircraft orders, notoriously lumpy month-to-month. Removing transports, the orders number was unchanged from the prior month, while core capital goods fell -0.1%, underperforming consensus calls for a +0.5% gain. Core shipments fell -0.7% for the month, in contrast to calls for a +0.3% increase; in addition, the prior month’s shipments figure was revised downward. Inventories ticked up slightly.

(+) The S&P/Case-Shiller home price index of 20 key urban markets came in with a gain of +0.8% for February, beating the median forecast calling for +0.7%. For single month, prices rose in all regions, led by Cleveland, Seattle and Detroit, with gains around the +1.5% range. Year-over-year, prices gained at a level of +6.8%, the strongest rate in four years.

(0/+) The broader-based FHFA house price index rose +0.6% in February, meeting expectations. Here also, prices gained in all regions, with the largest gains seen in the handful of regions encompassing KY to MS and OK through LA, followed by the West Coast. Year-over-year, this index series fared even better than the Case-Shiller, rising +7.2%, albeit at a slower pace than last month.

(+) Existing home sales for March rose +1.1% to a rate of 5.60 mil., seasonally-adjusted annualized, surpassing consensus estimates calling for a subdued +0.2% increase. Single-family gained +0.6%, while condos/co-ops fared better, gaining +5.2%. Regionally, the Northeast and Midwest gained around +6% each, while the West fared worst with a drop of -3%. The median home price rose to a record $252,100 on a seasonally-adjusted basis, representing a +6% gain over last year at this time.

(+) New home sales rose +4.0% for March to a seasonally-adjusted annualized level of 694k, above expectations for a -5.5% decline. Additionally, revisions for the last three months added over +60k to the new home count. Regionally, the month was strongest in the West, with a +28% gain, while the Northeast fell by -55%, some of which could be weather-related. Overall, the national sales figure represents a +9% increase in pace over a year ago. Inventory remains tight, at 5.2 months supply.

(+) The Conference Board’s index of consumer confidence for April rose by +1.7 points to 128.7, bucking consensus expectations for a decline of a point to 126, and creeping back toward an almost two-decade high. Household assessments of both present conditions and future expectations both rose, with the latter a bit more than the former, while the labor differential ticked down a bit.

(+) The final April edition of the Univ. of Michigan consumer sentiment index rose +1.0 point to 98.8, surpassing expectations for a much smaller increase to 98.0. Assessments of current economic conditions dropped by -0.1 points, while expectations for the future ticked up by +1.6 points. On the inflation side, median expectations for the coming year were flat at +2.7%, while those for the coming 5-10 years rose a tenth to +2.5%, in keeping with results over the past year for the most part. This report is not quite at its cycle high level, but close.

(+) The advance trade balance indicator for March came in showing a decline in the deficit by -$7.8 bil., to -$68.0 bil.—narrower than the -$75.0 bil. level forecast. It appeared that the previous month’s effects from timing of the Chinese New Year were a factor in the drop in imports, led by a variety of areas, such as food/beverage and capital goods, each of which declined nearly -4%.

(+) Initial jobless claims for the Apr. 21 ending week fell by -24k to 209k, below the 230k expected. Continuing claims for the Apr. 14 week fell by -29k to 1,837k, below the 1,850k expected by consensus. No unusual events were reported, with New York claims showing the most volume over the past few weeks. This release represented the lowest level of initial claims since 1969, as new lows continued to be reached on this indicator and implying a very strong labor market with little layoff activity.


Market Notes

Period ending 4/27/2018

1 Week (%)

YTD (%)

DJIA

-0.62

-1.03

S&P 500

0.00

0.44

Russell 2000

-0.49

1.72

MSCI-EAFE

-0.25

0.65

MSCI-EM

-1.02

-0.19

BlmbgBarcl U.S. Aggregate

0.01

-2.29


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2017

1.39

1.89

2.20

2.40

2.74

4/20/018

1.81

2.46

2.80

2.96

3.14

4/27/2018

1.82

2.49

2.80

2.96

3.13

U.S. stocks ended the week flat to down, as a flurry of generally strong earnings reports has also included mixed sentiment about how long this business cycle will last. From a sector standpoint, healthcare and utilities experienced strong gains, while industrials and materials lost the most ground during the week. The losing groups were affected by weaker-than-expected outlooks for coming quarters and potential ‘peaking’ in profit activity for several firms, not to mention now-higher interest rates, which naturally brings about broader concerns about the durability of this cycle.

However, the good news doesn’t seem to be over yet, as operating earnings for the S&P 500 appeared to have grown at a rate of roughly ~25% over the past year—the highest year-over-year increase in eight years—with just over half of companies reporting. Almost 80% of firms have reported numbers surpassing initial estimates, with the largest surprises having occurred in technology (notably Alphabet/Google and Facebook) and consumer discretionary (Amazon). Overall rates of growth are highest in energy, materials and technology, at well over +30% each. For the overall index, some of this represents the anticipated impacts of tax reform, but also underlying revenue growth and improved profit margins in a variety of sectors. A weaker dollar has played a role in helping export numbers, while higher oil prices have boosted energy and financials have benefitted from higher long-term interest rates (although the curve has flattened).

Foreign stocks ended the week with positive returns in local terms, with Japan and U.K. faring best, while emerging markets came in negatively—global exceptions were commodity-oriented nations that have benefited from higher pricing, such as Canada, Australia, Brazil and Russia. However, a very strong dollar for the week brought down these returns substantially. European earnings results have been reasonably good as of late, and the ECB left monetary policy unchanged last week, although concerns over flattening growth has led the ECB to retain dovish language, which markets seem to appreciate.

U.S. bonds ended flattish, as rates ticked higher but retraced lower by Friday, with the 10-year Treasury touching and coming back from the technically significant 3% level—for the first time in four years. Governments and floating rate bank loans outshined with positive returns, outpacing investment-grade corporates, which lost a bit. With the U.S. dollar rising over a percent for the week, conventional developed and emerging market bonds significant losses in USD terms.

Real estate lost ground as rates continued to tick higher, resulting in negative returns in the U.S., but far less so in Asia, while Europe earned positive returns. Cyclical lodging/resorts fared best, while retail/malls lost several percent to continue their weak returns year-to-date.

Commodities ended the week mixed, with gains in energy and agriculture offset by large declines in industrial metals and precious metals. Industrial metals were led by a drop in the price of aluminum, reversing a spike the prior week related to a Russian firm targeted by sanctions. Despite equity market volatility week-to-week, precious metals face the challenge of rising real interest rates from risk-free treasuries—gold’s primary competition for safe haven asset flows.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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 23, 2018.

Trackback Link
http://www.thehgroup.com/BlogRetrieve.aspx?BlogID=17607&PostID=1523736&A=Trackback
Trackbacks
Post has no trackbacks.

* Required





Subscribe to: The H Group SALEM Mailing List

Archive


Recent Posts