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Weekly Review - February 26, 2018

Weekly Review - February 26, 2018

Guest Post - Monday, February 26, 2018

Summary

In a slower, holiday-shortened week, a sparse amount of economic data was led by a decline in existing home sales, a sharp move higher in leading economic indicators, a strong jobless claims report, coupled with FOMC minutes from January that leaned toward economic optimism.

U.S. equity markets moved forward on the week, as did emerging markets, while foreign developed markets were held back by a stronger dollar. Bonds were flattish, with little change in interest rates during the week. Commodities were pushed higher by stronger pricing again in crude oil and natural gas.

Economic Notes

(0) The January FOMC meeting minutes were taken as a mixed bag by market participants—mostly, due to the potential impact on the future pace of interest rate increases. The tone was generally optimistic, with growth noted to be 'above trend', with an acknowledgement of tax reform, global growth and easing of financial conditions overall providing a tailwind. It might be important to note the meeting was conducted just prior to the employment and CPI reports for January, which caused general sentiment towards inflation to tick higher. A general consensus shows the probability of a March interest rate hike by the FOMC to be very high.

(-) Existing home sales for January experienced a decline of -3.2% to a seasonally-adjusted 5.38 mil. units, which disappointed relative to the median forecast of a +0.5% gain expected. Single-family units were responsible for the overall decline, where sales fell by -4%, while sales for condo/co-ops experienced gains just under +2%. Sales fell in all four regions, with the Midwest and South leading the way, in the -5% range, while declines in the Northeast and South were less severe. Year-over-year, this resulted in a decline of -4.8% for this metric. It continues to appear that a lack of available supply for homes is driving the underlying metric, as opposed to a lack of demand, with listing periods falling and median sales prices rising—up +5.8% over the past year to $240,500.

(+) The Conference Board's Index of Leading Economic Indicators rose a sharp +1.0% in January, continuing a streak of several months of gains. The month's gains were led by positive contributions from building permits, ISM new orders, stock prices and credit. The pace over the past six months accelerated to an annualized +7.8% pace, besting the +4.6% pace of the prior six months and the strongest level in seven years. Both the coincident and lagging economic indexes grew by a more modest +0.1%, a slower pace than that of the prior several months; however, like the leading indicator, the six-month pace for these has also picked up over the prior period. All-in-all, while the components of these indexes are well-known, the pace remains increasingly robust—as seen visually in the chart below—and indicative of strong underlying economic conditions.

(+) Initial jobless claims for the Feb. 17 ending week fell by -7k to 222k, which was lower than the expected 230k. Continuing claims for the Feb. 10 week declined even more dramatically, by -73k, to 1,875k, far below the 1,935k level forecast. Several states around the Great Lakes experienced the bulk of the declines, but otherwise there were no anomalies. This data continues to improve and demonstrate a very cyclically strong labor market.

Market Notes

Period ending 2/23/2018

1 Week (%)

YTD (%)

DJIA

0.36

2.74

S&P 500

0.58

3.05

Russell 2000

0.38

1.01

MSCI-EAFE

-0.44

0.91

MSCI-EM

1.39

5.00

BlmbgBarcl U.S. Aggregate

0.00

-2.13


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

2/16/2018

1.62

2.21

2.63

2.87

3.13

2/23/2018

1.64

2.25

2.62

2.88

3.16

U.S. stocks gained ground on the week. A sharp pullback in Wal-Mart shares affected the market early in the week, as results showed slowing e-commerce growth—a key area of focus in recent quarters across the consumer group as a variety of firms are combating the 'Amazon effect'. Stocks recovered by the end of the week with stronger earnings growth in other areas as the flurry of Q4 reports have wound down, with the percentage of S&P firms beating estimates reaching an eight-year high. Concerns over a semi-hawkish tone of the FOMC minutes released mid-week were calmed by an expected more dovish and tempered testimony by Chair Powell in his first appearance before Congress in this week. From a sector standpoint, technology and materials led the way, while more defensive sectors telecom and consumer staples lost several percent.

Foreign stocks were mixed as Japan gained ground in local and USD-terms, upon strong manufacturing and export results. Europe and the U.K. ended with deeper losses due to the stronger dollar. An ongoing story in Europe is the timing of when QE accommodation is expected to be removed—as economic growth improves, the timeline has moved up. Emerging markets fared best, with strong gains in Brazil, China and Russia as strength in commodity prices and better internal consumer growth has kept sentiment high.

U.S. bonds were little changed on the week, with few news reports moving the interest rate needle, in contrast to prior weeks when inflation was the lead story. Government and credit performed similarly, as bank loans led with small gains. Foreign developed and emerging market bonds both gained slightly in local terms, which was given back and converted to losses when the stronger U.S. dollar was taken into account. European bonds haven't been in the news due to continued low yields in several countries, but yields ticked up on Italy upon some concern over elections coming up in a week and lack of a clear front-running party in sight.

Real estate lost ground in the U.S. and Europe, but gained in Asia. REITs have suffered this year thus far, down -8% in the U.S. with shorter-term concerns over interest rates; the irony is that higher inflation has tended to benefit real estate investments over time.

Commodities ticked a few percent higher on net, with the energy and soft commodity sectors gaining ground, while industrial and precious metals fell back by several percent. Crude oil spot rose over +3% to a close of $63.55, as price levels retraced back upward towards highs from January. This was following discussions between OPEC ten other oil-producing states, such as Russia, for a long-term alliance intended to keep oil prices stable. The battle between foreign producer supply cuts and high U.S. shale production continues as markets seek the right balance.

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 February 20, 2018.

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