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Weekly Review - August 29, 2016

Weekly Review - August 29, 2016

Guest Post - Monday, August 29, 2016


Economic data for the week was decent with strong reports from durable goods, new home sales, and jobless claims while existing home sales came in a bit weaker. Fed Chair Janet Yellen's speech at the annual Jackson Hole conference alluded to a desire to perhaps boost rates sooner than year-end.

U.S. equities declined on the week with a higher probability for rate hikes, while foreign stocks generally fared better. Bonds were also relatively flattish in both the U.S. and abroad. Commodities were also hurt by the dollar with crude oil prices declining a few percent.

Economic Notes

(+) Durable goods orders for July rose +4.4%, which outperformed forecast of +3.4%. This was largely due to the often-sporadic results of the transportation equipment group, as Boeing aircraft orders rose +11%. Removing those effects, core durable goods orders gained +1.6%, which still outperformed the just-positive expectations of +0.2% for the month. Results here were based on solid results in computers/electronics and other electrical equipment. Core shipments, however, declined -0.4%, relative to an expected +0.3% gain, as machinery shipments were down—this is a group which includes the oil/mining sector that has experienced weak capex since the oil price crash. This wasn't a terrible report, considering the always-sporadic nature of some key components. However, on a year-over-year basis, goods orders remain down -3.3%.

(-) The FHFA house price index rose +0.2% in June, which was a tenth lower than expected. Regionally, gains were strong in the South Atlantic and Mountain areas, while values for states along the West Coast declined nearly a half-percent. Year-over-year, the national index has gained +5.6%, which is consistent with recent trend and other home price surveys.

(-) Existing home sales for July fell by -3.2%, which disappointed relative to an expected -1.1% decline. The primary driver for the headline number was a decline in multi-family sales, which were down by -12%, while single-family were down a more tempered -2%. Regionally, the Northeast and West experienced the greatest declines, while sales in the West rose by a few percent. Per the National Association of Realtors, it appeared that sales slowing could have been due to lower inventory levels.

(+) New home sales for July came in much higher than expected, up +12.4% to a seasonally-adjusted annualized level of 654k (580k was the forecasted figure). Sales rose in almost all regions, led by the Southern U.S., while the West came in flat. Market inventory also fell, from a previous reading of 4.9 months down to 4.3 months. In fact, new home sales came in at the highest level since the last quarter of 2007, and showing that housing production is finally returning to pre-crisis levels, although it's taken nearly a decade to get back there.

(-) The 2nd ('preliminary') estimate of GDP for Q2 was revised down a tenth of a percent to +1.1%, on par with expectations. The key difference was a larger drawdown in inventories than expected, although it already lacked strength, while personal consumption was revised slightly higher (from +4.2% to +4.4%). GDP estimates for Q3 remain in the 2.5-3.0% range, which assumes a stronger recovery in inventories relative to the recent past.

(+) The advance goods trade balance for July came in at -$59.3 bil., narrower than the forecast -$63.0 bil., with imports falling across the board and exports rising—notably in the segments of food, feeds and beverages. No doubt the stabilized/weaker dollar has improved the export picture.

(-) The August final version of the University of Michigan consumer sentiment index ticked down by a few tenths of a point, to 89.8, a point under the forecasted 90.8—a result that has remained in a relatively tight range for over a year. Future expectations fell by a point and a half, while the assessment of current economic conditions rose by almost a point. Inflation expectations for the coming 5-10 years declined by -0.1% to 2.5%, which is an all-time low for the index.

(+) Initial jobless claims for the Aug. 20 ending week fell by a slight -1k to 261k, better than the expected 265k. Continuing claims for the Aug. 13 week fell a bit to 2,145k, also below the expected 2,155k. It appears weather conditions may have boosted initial claims in the Gulf region, while several of the largest states experienced declines. Claims continue to fall at very low levels, especially when measured by the somewhat-smoothed 4-week moving average. In fact, on that measure, they're now lower than the previous low point in late 2000 and are as low as they were in the early 1970's.

Read the "Question of the Week" for August 29, 2016:

What is the impact of real estate becoming its own sector?

Market Notes

Period ending 8/5/2016

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U.S. stocks largely declined on the week in the large-cap group, although small-caps ended slightly positively. From a sector perspective, financials and technology were the only sectors ending in the green (the former due to better chances of a rate hike most likely, improving their business outlook), while defensive utilities and health care lost the most ground. For the latter, biotech was negatively impacted by further comments by Presidential candidate Clinton regarding drug price increases in the sector (in this instance, EpiPens), which raises concerns over possible future government actions to limit profitability.

With low summer volatility continuing to be the trend, investor attention was focused on Fed Chair Janet Yellen's remarks at the annual Jackson Hole conference hosted by the Fed and consisting of a variety of global central bankers and special guests. These comments included that the 'case for an increase in the Fed Funds rate has strengthened in recent months' was taken by the market as a probability-raiser for September. Regardless, chances of another hike this year, whether it be Sept. or Dec., have increased as economic data has improved somewhat, and, more importantly, the global capital market fallout from Brexit appears to be surprisingly contained. However, and also noted in Yellen's remarks, any movement in rates continues to look measured in keeping with less-than-spectacular growth and inflation readings. The road to 'normalized' rates could continue to be a long one.

Foreign equities gained ground in Europe and the U.K., with Brexit continuing to be a low-level concern. Emerging markets underperformed developed markets, namely in China and Latin America, the latter of which were hampered by lower commodity prices. Japan continues to struggle; while in USD terms, due to a strong yen, indexes show a slight positive result year-to-date, while local equities are down -15%. Skepticism continues to fester surrounding the Japanese government's ability to generate some type of inflation or economic growth—so far efforts have been ineffective. Interestingly, the governor of the BOJ noted last week that there could be room for another interest rate cut (taking rates even further negative). Economists continue to debate the effectiveness of a 'deep' negative interest rate policy.

U.S. bonds were little changed, with rates ticking a bit higher in the belly of the yield curve. Interestingly, similar to the equity market, the last month has been the least volatile for long-term Treasuries in the last 30 years. Credit fared better than governments, with high yield indexes ending the week with positive returns, followed by positive results from floating rate bank loans. Foreign bonds in local terms performed similarly, but were negatively impacted by a stronger dollar, in both developed and emerging markets.

Real estate lost ground in the U.S., albeit to a lesser degree than general equity markets. Results in Europe and the U.K. gained, while Japanese REITs suffered. During the last several months, results in the apartment/residential sector have flattened, while more economically sensitive lodging/resorts and healthcare have outperformed as of late. As discussed earlier, we could see enhanced visibility of real estate due to its inclusion into the S&P as its own sector, while continued low interest rates and low levels of incoming commercial building supply are other important tailwinds.

Commodities were also impacted by a stronger dollar, with the entire group losing ground, including agriculture, metals and energy generally. Crude oil fell back by about -3% to $47.60 due to a stronger dollar and lack of change in weekly rig counts; natural gas, however, bucked the trend by gaining over +10% due to warmer weather in the U.S., which boosts air conditioning demand.

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 22, 2016.

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