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Weekly Review - December 26, 2017

Weekly Review - December 26, 2017

Website Administrator - Tuesday, December 26, 2017

Summary

Economic releases last week consisted of very strong results in housing and manufacturing, as well as the broad measure of leading economic indicators, mixed results from personal income/spending and durable goods orders and slightly worse sentiment and jobless claims.

U.S. equities gained with tax reform efforts wrapping up, which boosted pre-Holiday sentiment. Foreign equities outperformed with help from a weaker dollar. Bonds generally lost ground as interest rates gained across the curve. Commodities also rose slightly, along with the price of crude oil.

Economic Notes

(0) The final GDP report for Q3 showed a revision downward by a tenth of a percent to +3.2%, which was a small surprise. Consumption growth and net trade were both revised lower; however, state and local government spending was revised higher by several tenths. PCE inflation results fell just slightly, remaining under target in the 1.3% annualized quarterly range for core. Expectations for Q4 GDP remain at about +2.5%.

(0) Personal income rose +0.3% in November, which was a tenth lower than expected; on the other hand, personal spending rose +0.6%, which was a tenth stronger than consensus (spending gained nearly +5% on a year-over-year basis, which is seen as strong). These changes lowered the personal savings rate by -0.3% to 2.9%, which is a low for the past decade. The PCE price index for the month rose +0.2% for headline and just under +0.1% for core, which increased the year-over-year inflation indexes to +1.8%—due to a rise in energy prices over the period—and +1.5%, respectively—but both below the Fed’s target yet again.

(-) Durable goods orders for November rose +1.3%, which underwhelmed relative to a median forecasted increase of +2.0%. On a core level, subtracting the most volatile components, orders fell -0.1% compared to a forecasted +0.5% increase. The key differential between the two consisted of a substantial rise in defense and transportation equipment, which tend to be lumpy. Core durable goods shipments rose +0.3% for the month, which was on par with expectations, and inventories rose +0.2%.

(+) The Philadelphia Fed survey for December showed a gain of +3.5 points to +26.2, which bucked expectations for a drop to +21.0. New orders, shipments and inventories all increased, while employment and prices paid declined. Overall levels continue to point to manufacturing sector expansion at a decent rate.

(+) The FHFA house price index rose +0.5% for October, which was a tenth of a percent higher than expected. Gains were spread fairly evenly throughout the nation, with gains in almost all regions—the largest being in the East South Central (KY through AL region) and Mid-Atlantic states (defined as NY/NY/PA). Year-over-year, home prices by this measure are up +6.6%, which is exceptionally robust.

(+) Existing home sales gained +5.6% in November to a seasonally-adjusted annualized rate of 5.81 mil. units. This was a new recovery high (highest monthly level since Dec. 2006), and sharply outperformed expectations of +0.9%. Both segments experienced strength, with single-family rising +5% and condos/co-ops up +14%. Regionally, sales rose in the higher single-digits in all areas but the West, which declined slightly. The results represented a recovery from hurricane-related pullbacks during the two prior months, but other factors are also at play. Interestingly, home sales typically take a dip around the Holidays, which seasonal adjustments do their best to account for, but lackluster new home building has kept inventory of existing homes tighter. Another wrinkle is the possible impact of new tax legislation, which has made living in high-tax states far less appealing than prior, and could spur some moving activity over time.

(+) New home sales rose a dramatic +17.5% in November to a seasonally-adjusted annualized rate of 733k units, beating expectations for a more modest +5% gain. All broad regions saw gains for the month, with the South and West in the lead—the former led by hurricane recovery activity. Interestingly, this was the largest single-month gain since the summer of 2005. Months supply fell by a month to 4.6 months.

(+) Housing starts for November rose +3.3% to 1,297k—a new high for this cycle—which surprised relative to expectations calling for a -3.1% decline. Under the hood, single-family starts rose by over +5%, while the more volatile multi-family group declined by just under -2%. The good news is that single-family starts are up +13% year-over-year, which is a substantial gain. Regionally, starts in the Southern U.S. rose +11% in a continued rebuilding effort post-hurricane, the West rose +19%, while the Midwest and Northeast fell sharply—the latter in a reversal of big gains the prior month, both in the magnitude of the 40% range in both directions. Building permits, by contrast, fell by -1.4%, but fared better than the expected -3.5% drop, with negative revisions for October also slightly outweighing positive revisions higher for Sept. Single-family permits rose by over +1%, while multi-family fell -6%.

(+) The NAHB homebuilder index rose +5 points to 74—the highest level since mid-1999—stronger than the expected 70 reading, and based on a starting level revised lower during the prior month. All sub-segments gained, led by prospective buyer traffic up +8 points, followed by current sales and future sales expectations. Regionally, the Midwest and West came in with the strongest performance, while the Northeast fell back somewhat to reverse strong gains of the prior month. This indicator offers value in being somewhat predictive of housing starts on a look-ahead basis.

(+) The Conference Board'sIndex of Leading Economic Indicators for November rose +0.4%, led by continued improvement in new manufacturing orders, business sentiment, credit and financial indicators, such as stock prices and spreads. This brought the pace of the past six months to an annualized rise of +6.1%, which surpassed the pace of +4.9% for the prior six months. The coincident and lagging economic indicators rose +0.3% and +0.1%, respectively, also continuing their string of recent monthly positive performances.

Conference Board's Index of Leading Economic Indicators for November

(-) The final December edition of the Univ. of Michigan index of consumer sentiment index fell just under a point to 95.9, versus expectations of a slight rise to 97.2. Expectations for the future ticked down just slightly, while the bulk of the move was due to consumer assessments of present conditions. Compared to the early release, inflation expectations for the coming one year fell a tenth of a percent to 2.7%, as did expectations for the coming 5-10 years to 2.4%.

(-) Initial jobless claims for the Dec. 16 ending week rose by +20k to 245k, above the 233k expected. Continuing claims for the Dec. 9 week also rose, by +43k, to 1,932k, which was above the 1,898k anticipated by consensus. No unusual events were reported by the DOL, and these continue to run at low levels.


Read the "Question of the Week" for December 26, 2017

Now that the tax plan is finished, now what?


Market Notes

Period ending 12/22/2017

1 Week (%)

YTD (%)

DJIA

0.42

28.28

S&P 500

0.30

22.23

Russell 2000

0.84

15.13

MSCI-EAFE

1.25

23.87

MSCI-EM

2.02

32.33

BlmbgBarcl U.S. Aggregate

-0.60

3.01


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

12/15/2017

1.31

1.84

2.16

2.35

2.68

12/22/2017

1.33

1.91

2.26

2.48

2.83

U.S. stocks gained on the week as tax reform made its final strides through the legislative process, slated to take effect Jan. 1, although most volume occurred earlier in the week. From a sector standpoint, energy experienced sharp gains in keeping with higher prices for crude oil. Utilities lagged with negative returns on the week, with higher interest rates and perhaps various aspects of the new tax bill which do not favor the utilities sector. Interestingly, a sharp drop in the price of Bitcoin over the past week, nearing a third of its value, did not appear to carry over to other financial markets.

Foreign stocks generally fared better than U.S. equities, with help from a weaker dollar. Emerging markets fared best, with gains in energy and commodities, followed by U.K. and Europe. Sentiment generally followed tax reform in the U.S., but was otherwise tempered due to the low volume pre-holiday week. The exception was in Spain, which lost ground after elections in Catalonia saw separatists fared well. The Bank of Japan elected to keep interest rates unchanged, which is slightly negative rates on the short end and 10-year rates at zero, although assessments of economic growth there have improved.

U.S. bonds fared poorly as interest rates rose along the yield curve—as the passed tax reform act is expected to improve economic growth and keep the Fed’s pace of rate increases intact and/or accelerate them ultimately, as well as pick up inflation pressures. The yield on the bellwether 10-year treasury reached 2.5%, which is the highest level since March. With a slightly larger yield advantage, credit fared a bit better than government bonds, with high yield and bank loans ending the week with positive returns. Foreign developed bonds were little changed during the week, while local currency emerging market bonds led all regions.

Real estate was mixed, with international REITs gaining with help from a weaker dollar, while U.S. REITs declined for the week, as interest rates rose along with prospects for economic growth due to a passed tax cut.

Commodities generally gained on net for the week, with positive returns for energy, industrial and precious metals. Crude oil gained +2% to end the week at $58.47.

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 December 18, 2017.

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