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Weekly Review - August 28, 2017

Weekly Review - August 28, 2017

Guest Post - Monday, August 28, 2017

Summary

In a very light late summer week for economic data, housing statistics were generally lackluster, jobless claims remained within recent ranges, while durable goods fell, as expected.

Global equity markets gained for the week, upon weak volumes and political rhetoric outweighing any meaningful economic news to move the needle. U.S. and foreign stocks both saw positive results, with emerging markets leading the way—foreign assets were boosted by a weaker dollar. Bonds also moved a bit higher, led by high yield. Commodities were mixed with little change in the prices for energy.

Economic Notes

(0) Durable goods orders for July declined -6.8%, which slightly trailed the expected -6.0% decline. Core orders, however, removing the more volatile components ended the month +0.4% higher, which matched expectations. The weak headline figure was almost entirely due to non-defense aircraft orders, which had provided a boost the prior month of June. In the core data, defense orders rose substantially, and inventories gained for the 7th month straight. Core shipments also rose +1.0%, which surpassed the expected +0.2% gain.

(-) The FHFA house price index rose +0.1% for June, which fell short of the +0.5% forecasted gain. Prices rose in just over half of the national regions, with the KY/TN/MS/AL and West coast regions ending up with the largest gains. Year-over-year, the overall index is up +6.9%, which is remains quite high from a historical standpoint, especially in after-inflation terms.

(-) Existing home sales for July declined by -1.3% to a seasonally-adjusted level of 5.44 mil. units, the lowest level in a year, contrary to an expected gain of +0.5%. Single-family home sales fell just under -1%, while condos/co-ops declined by -5%. Regionally, the sales in the Northeast fell by almost -15% for the month, while the West gained +5% to lead the way. Year-over-year, existing home sales are +2% higher than a year ago, which is a generally weaker pace than a few years ago.

(-) New home sales fell -9.4% in July to a seasonally-adjusted annualized level of 571k units—the lowest level of 2017—in contrast to a forecasted decline of only -3.2%. On the positive side, there were some upward revisions for prior months. Declines were widespread across the U.S., with the West seeing the largest declines, while the Midwest experienced a slight bump higher. Inventory also rose by 0.6 months to 5.8 months, with is the highest it's been in several years. These month-to-month variables are difficult to take at face value by themselves, but, as seen in the longer-term chart beginning in 1980, upward progression has continued, albeit in a very choppy manner. Year-over-year, this represents a drop of almost -9%, due to a spike in sales last July. Removing that anomaly, the trend has been generally flat.

July 2017 New Home Sales

(0) Initial jobless claims for the Aug. 19 ending week rose by +2k to 234k, below the 238k level expected. Continuing claims for the Aug. 12 week were unchanged at 1,954k, just a bit above the 1,950k level expected. No special issues were reported as some of the summer plant shutdowns may have begun to normalize.


Read the "Question of the Week" for August 28, 2017

Are we about to have another debt ceiling debacle?


Market Notes

Period ending 8/25/2017

1 Week (%)

YTD (%)

DJIA

0.71

12.22

S&P 500

0.75

10.58

Russell 2000

1.46

2.32

MSCI-EAFE

0.61

16.84

MSCI-EM

2.44

25.87

BlmbgBarcl U.S. Aggregate

0.16

3.38


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

8/18/2017

1.02

1.33

1.77

2.19

2.78

8/25/2017

1.03

1.35

1.77

2.17

2.75

U.S. stocks gained back some ground last week, albeit on continued low volume, with small caps outperforming large cap stocks. It appears some hope for tax reform by behind-the-scenes Congressional work has boosted sentiment for such reform maintaining momentum. Some were looking for policy clues from the annual central bank retreat at Jackson Hole, where Yellen and other central bankers speak on policy matters, but this appeared uneventful this year, other than Yellen sounding more pro-financial regulation than some expected. Small caps remain weak year-to-date, which could partially be due to their domestic orientation as foreign prospects have improved, or their higher valuation. By sector, oddly for an up-week, telecom and utilities led the way, followed by materials, while consumer staples was the only one to lose ground last week.

The dollar declined nearly -1%, which served as a tailwind to foreign assets. Interestingly USD has fallen nearly -10% for the year thus far, in a reversal of prior strength and contrary to some calls for a renewed spike higher as the Fed was supposed to pick up interest rate efforts. (Higher rates can buoy a currency in some cases, due to the 'carry' effect, absent other factors.) As with many convicted predictions, neither has occurred. For the week, the currency effect was mostly from a stronger euro, as a light gain in Europe was pushed to a +1% gain for the week; U.K. returns were even stronger, although the currency effect was less of a factor. Japanese stocks moved in the opposite direction due to weakness in retail, and the yen declined, turning a small loss into a larger one.

Emerging markets were the winners again for the week, with a currency effect adding to already-robust local currency returns in several key nations, including Brazil, China, Russia, South Africa and Turkey. Brazilian gains were led by an announcement of the government privatizing electric utility assets.

U.S. bonds were up slightly in keeping with little movement along the yield curve, especially on the investment-grade side. However, high yield and bank loans outperformed. Foreign debt also fared well on both the developed and emerging market side due to the U.S. dollar weakness.

Real estate experienced gains for the week, over two percent in the U.S. to vie with emerging markets as the strongest performer. Asian and European markets declined, however, despite the positive currency effect. By sector, the much maligned retail/regional malls group was responsible for much of the improvement, while health care and residential also contributed.

Commodities were mixed to a bit negative for the week, with strength in industrial metals (copper and nickel) and sugar, while energy started strong but normalized later in the week as encroaching Hurricane Harvey on the Gulf Coast did not appear to spook natural gas and oil markets due to supply and transportation effects. Crude oil was down a tempered percent and a half to $47.87. Other segments, including agriculture and precious metals were mixed.

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 August 21, 2017.

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