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Weekly Review - August 3, 2015

Weekly Review - August 3, 2015

Guest Post - Monday, August 03, 2015


  • Economic data last week was highlighted by a lukewarm GDP report, mixed housing and consumer confidence surveys, but more positive near-term industrial reports. The FOMC meeting statement didn’t offer any radically new insights, as expectations for an initial rate hike continue to be focused on later this year.
  • U.S. equities performed positively on the week with decent earnings reports, and foreign stocks were largely in line. Bonds also gained as investors apparently felt comfortable with the Fed’s current hints on interest rate policy. Commodities suffered additional losses this week, as crude oil fell below $50/barrel, ending a painful July for the energy patch.

Economic Notes

(0) As mentioned in more detail last week, the FOMC didn’t change policy at their minor July meeting. As we’ve come to expect from their statements, labor markets are a primary focus, with inflation coming in second place. Apparently labor markets aren’t yet strong enough to warrant a high degree of confidence in making a rate move, although the Fed statement desiring ‘some’ improvement is much lower of a threshold than implied by previous meetings. Naturally, everyone is slicing and dicing the wording again. The key consensus expectation is that rates are poised to rise in either Sept. or Dec., likely by 0.25% in the first shot, although it appears many market participants are not as enthusiastic about additional increases as the Fed seems to be at this point.

(-) The advance report on second quarter GDP showed growth of +2.3%, which was weaker than the +2.6% expected (and much weaker than the higher 2’s anticipated by some economists). Positives included improved exports (as the dollar appreciation trend tempered somewhat, but remained challenging), consumer spending (up almost +3%) and higher state/local government expenditures. Negative influences were a downturn in fixed investment (including weakness in energy spending), as well as federal government spending. Inventories are a bit higher than average over the last few quarters, and getting this back to average could take a few percent out of GDP in coming quarters. The PCE price index component rose fairly dramatically from near flat to +2% on a seasonally-adjusted average annualized basis, taking the year-over-year inflation number to +1.3%.

Revisions for the last three years were the more talked-about piece for some economists. Interestingly, the Q1-2015 number was altered dramatically upward from a negative -0.2% to a still-weak +0.6%, while GDP for several quarters during 2012-2014 were revised downward to result in the annualized average of +2.3% moving down to +2.0%. None of these older numbers matter that much now, but do show a weaker pattern of growth than was previously thought, and this casts a negative tone on things a bit. Some normalizations from seasonal adjustments may have also played a role here, as these have been an ongoing problem, especially in the first quarter reports from the last several years. From a broader standpoint, average GDP growth for the last 10 years has been a fairly anemic +1.4%. By contrast, the decade prior (1995-2005) came in at +3.4%, and the entire dataset (dating from the late 1940’s) averaged +3.2%. Clearly, the Great Recession played a role in skewing the figures, but doesn’t explain all of it.

(-) The employment cost index for the 2nd quarter rose +0.2% quarter-over-quarter, lagging the expected +0.6% increase. Taking this out to a year-over-year basis, total comp rose +2.0%, the pace of which was down a bit from last quarter. Wage gains were on target with the broader number for the quarter and year, as it seems commission-based comp was the culprit for the deceleration.

(+) Durable goods orders for June rose +3.4%, which was slightly better than the +3.2% gain expected. Even removing the volatile transports and other cyclical segments, the core orders piece rose +0.9%, roughly double the gain anticipated. Shipments, however, declined by -0.1% versus an expected +0.6% gain (shipments are relevant as they plug right into GDP calculations).

(+) The Chicago PMI for July came in at 54.7, a +5.3 point boost from June and a positive surprise compared to the 50.5 reading expected—this is a solid expansionary reading after two straight months of sub-50 contractionary results. Under the hood, results were led by double-digit gains in production and new orders, while others such as order backlogs, supplier deliveries and employment improved but remained in negative territory. Wage growth remained tempered with a quarter of respondents noting no change over the past year and almost half indicating 1-2% gains. Anecdotal information sounded positive as companies reported a revival in output.

(-) The 20-city S&P/Case-Shiller home price index fell -0.2% in May, which disappointed relative to the expected +0.3% increase. The increase/decrease split by city was split at 10 each. Thoughts are that seasonal adjustment factors are playing havoc with some of the results, as fall/winter months have been stronger than expected, while spring/summer have been a bit weaker. The year-over-year increase is +4.9%, which is not bad on a ‘real’ basis, considering very low inflation levels—inflation is what residential home prices are expected to track closely over time.

(-) Pending home sales for June fell -1.8%, in contrast to a +0.9% expected gain, and results for May were also revised downward by a third of a percent. Regionally, growth in the Northeast and West increased by about a half-percent, while the Midwest and South regions each fell by an identical -3%. Year-over-year, pending sales were +11% higher than last year.

(-) The Conference Board consumer confidence survey for July fell by a dramatic -9 points from the prior month, from 99.8 to 90.9, in contrast to the 100.0 level expected. Future expectations falling by -12 points was the key catalyst for the decline, although assessments of current conditions fell by just a few points. The labor differential (jobs hard to get vs. plentiful) eased downward. This is quite a sharp decline, in fact, comparable to the 2013 government shutdown period, although no clear catalyst appears to be at play—it may be an anomaly, or not—although labor market pessimism seemed to be a key cause. Other indicators may offer a better qualitative view.

(0) The final Univ. of Michigan sentiment survey for July was little changed from the initial version, falling -0.2 points to 93.1, disappointing relative to a hoped-for 94.0 reading. Consumer expectations for the future fell a point, while assessments of current conditions rose about by about a point. Inflation expectations rose slightly to 2.8%, which is on the higher side of the past year, but these have tended to bounce around between 2.5-3.0% fairly regularly in recent years, in keeping with long-term inflation levels.

(0) Initial jobless claims for the Jul. 25 ending week rose by +12k to 267k, but just under the 270k estimate. Continuing claims for the Jul. 18 week came in at 2,262k, which was above the expected 2,205k. No special factors were reported, but the results were much more ‘normal’ looking than low claims figure of the week prior, which may have been related to seasonal adjustment factors in the auto industry.

Read the "Question for the Week" for August 3, 2015:

Commodities appear to be challenged again. Do they still offer any benefits?

Market Notes

Period ending 7/10/2015

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BarCap U.S. Aggregate



U.S. Treasury Yields

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5 Yr.

10 Yr.

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U.S. stocks gained just over a percent on the week, mostly due to results on Tuesday, as the rest of the week was generally lackluster. Earnings appear to have been the primary catalyst for sentiment in the U.S., last week, as results from Ford and UPS spearheaded some early gains. However, the picture has been mixed overall. From a sector standpoint on the week, utilities and industrials outperformed, while energy and financials underperformed. Markets have continued to trade in a relatively narrow range over the last several months, as no major ‘breakout’ items have surfaced on either the upside or downside.

Last week represented the last big earnings week for Q2, with over 70% of firms in the S&P 500 having reported. For the quarter, the S&P total earnings growth figure was negative, at -3%, while excluding energy, that radically improved to positive growth of +4%. Results have been decent, with 50% of firms reporting earnings surprises. Of course, the bar is set low, with downgrades having been in place on an ongoing basis for recent months. On average, health care and consumer staples firms have performed the best over the period, while tech, industrials and some other cyclical areas lagging.

Outside the U.S., many developed markets, including Japan and Europe performed in line with the U.S., while Australia, Brazil and Mexico surprisingly performed well, despite the commodity sensitivity. Brazil has been fighting several headwinds, including a corruption scandal, but these are almost cast aside as ‘normal.’ Chinese stocks (both ‘H’ shares and local ‘A’ shares) continued to be the laggards, losing several percent on the week and over -10% in July, although year-to-date returns remain positive—the A showing a lot more volatility than the H. Debate continues about the role of the Chinese government’s interventions into the local market, and whether market forces are being allowed to prevail. No doubt more to come in this emerging area, coupled with Chinese growth concerns taking over as the key global area of worry, taking over for Greece during the past few weeks.

U.S. bonds fared well with falling rates as investors were assured in a tempered Fed response, apparently from the tone in their statement. Longer duration bonds outperformed, while intermediates including high yield debt performed decently. Currency movements were not a big factor last week, as developed and emerging markets performed largely in a similar range as U.S. bonds.

Real estate assets rose in keeping with broader equities. U.S. REITs generally outperformed foreign, with lower interest rates helping somewhat.

Commodities suffered another lackluster week. West Texas Intermediate Crude ended the week a bit lower than where it started—just above $47 a barrel—as energy vied with agriculture as the worst-performing sub-index. Precious metals were the sole exception, gaining about a percent, breaking a recent losing streak as interest rates remained contained. Crude oil spot prices fell just over -20% in July alone, as supply concerns continue to fester; this was the primary negative driver for commodity returns in the period, as most other segments fell, but to a far lesser degree.

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 July 27, 2015.

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