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Weekly Review - February 27, 2017

Weekly Review - February 27, 2017

Guest Post - Monday, February 27, 2017

Summary

On a shortened holiday week, and a light one for economic data, housing results were generally strong, and jobless claims continued to run at low levels.

Global equity markets were generally higher on the week, with continued improved sentiment, while U.S. bond markets rallied upon lower interest rates, as did foreign bond markets. Commodities ended flat, with little change in crude oil prices.

Economic Notes

(0) The FHFA home price index for December came in with a gain of +0.4% over the prior month, which was slightly short of expectations. From a regional standpoint, the lower Midwest Great Lakes states experienced the strongest gains, while the Mid-Atlantic region lagged with a percent decline. For the full year, this represented a gain of +6.2%, and a 5-year average annualized gain of just under +6%—both of which were quite healthy from a historical perspective. This particular index is based on transactions involving single-family conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. The definition of 'conforming' varies by time period and region somewhat, but is generally set at $417k for most of the U.S. currently. As we can see below, the yearly rate of change has returned to a relatively level in recent years, following the dramatic financial crisis blowup. Such blowups and recoveries can distort results for surprisingly long periods of time.

FHFA Home Price Index for December 2016

(+) Existing home sales in January rose +3.3% to a seasonally-adjusted annualized 5.69 mil., which was far stronger than the +1.1% gain expected by consensus estimate—bringing the year-over-year increase to just under +4%. December results were also revised higher, which was a positive. Single-family gained just under +3%, while condos/co-ops rose over +8%, in a reversal of prior month weakness. Regionally, sales in most areas gained, led by the West and Northeast, while the Midwest declined by just over a percent. Interestingly, inventory has continued to decline, with single family for-sale levels the second lowest January on record—just over half of those sold during the prior Jan. 2007 peak for the single month. Inventory stands at 3.6 mo. of sales, which also represents a multi-decade low point.

(-) New home sales for January rose by +3.7% to a seasonally-adjusted rate of 555k, which fell below the 571k expected for the month and included some downward prior-month revisions. Sales ticked higher in most parts of the country, especially in the Midwest and South, which appear to be weather-related, while the West fell back slightly. Inventory was unchanged at 5.7 months supply, which remains at a high level.

(+) The final February Univ. of Michigan consumer sentiment survey showed a slight revision upward by +0.6% to 96.3, which beat consensus forecasts calling for 96.0. Assessments of current conditions rose slightly, as did future expectations. For inflation, the 5- and 10-year ahead expectations were flat at 2.5%, while those for the next year fell a tenth to 2.7%.

(0) Initial jobless claims for the Feb. 18 ending week rose by +6k to 244k, which was just above the expected 240k level. Continuing claims for the Feb. 11 week fell by -17k to 2,060k, below the 2,068k expected by consensus. There weren't any anomalies reported by the DOL in regard to the data, as claims continue to run at a very low rate relative to history.

(0) The FOMC meeting minutes from the one at the end of January showed that participants felt a rate hike was appropriate in a 'fairly soon' time frame assuming that economic data, including inflation and employment, continue to move in the right direction. However, there didn't seem to be extreme urgency, either, so the general expectations for a fed funds increase in March remained at under 25%, while they moved to 70% for June. Conversation at this point is around timing, particularly the risks of waiting to raise rates which could stoke inflation, if it picked up, versus acting pre-emptively in light of a variety of uncertainties with economic, fiscal and regulatory policy looking ahead this year (but there is always going to be something to worry about).

Market Notes

Period ending 2/24/2017

1 Week (%)

YTD (%)

DJIA

0.99

5.81

 

S&P 500

0.73

6.09

Russell 2000

-0.36

2.89

MSCI-EAFE

-0.14

4.21

MSCI-EM

0.48

9.42

BarCap U.S. Aggregate

0.37

0.68

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

2/17/2017

0.50

1.21

1.92

2.42

3.03

2/24/2017

0.52

1.12

1.80

2.31

2.95

U.S. stocks continued to accumulate gains with hopes for improvements on the policy side, including tax reform, etc., that has perpetuated flows into domestic equities. Interestingly, the more defensive sectors of utilities, telecom and healthcare led the way, while energy lagged with a decline just over -1%.

Early in the week, positive news from Wal-Mart, and of particular importance, the online segment of the firm, buoyed sentiment. Amazon is assumed to be the 'decider' when it comes to online commerce and is the first firm most think of when analyzing the ongoing cannibalization of brick-and-mortar commerce by the internet. But, as evidenced by this example, other firms are also heavily involved in this shift, particularly those with advantages in scale, logistics and marketing. This explains some of the troubles with the big department stores, and corresponding average retail mall, which we've described before.

Outside the U.S., emerging market and Japanese equities experienced gains for the week, while Europe declined. For the latter, generally decent but mixed earnings results for the prior quarter were a broad catalyst, including continued concern over presidential election polling in France (which seemed to calm a bit last week) and Italian banks, which have been a source of ongoing concern. These are interestingly tied together, as French candidates have differing views of the nation's place in the Eurozone—of which they're one of the largest members and arguably critical for its survival. Italian banks also need broader Eurozone support (and capital); therefore, the breakdown or threat of breakdown of the Union has broad implications on a variety of sectors on the continent. Aside from Trump's policies, the foreign political environment looks to be a key source of headlines for 2017. In emerging markets, on the other hand, a lack of progress in Trump's more dramatic and controversial policies and bottoming of domestic economic conditions look to be driving continued much improved sentiment.

U.S. bonds fared well on the week, as interest rates ticked downward across the curve by almost 10 b.p. Much of this decline occurred towards the end of the week's trading on Friday, with perhaps some paring back of expectations for a Fed rate hike in coming months or progress towards fiscal action in Washington. Long treasuries earned the highest gains, while other investment-grade corporate areas, high yield, bank loans were generally in line with each other. Foreign bond indexes performed similarly to those in the U.S., with little change in the U.S. dollar index for the week.

Real estate experienced one of the more positive weeks of any group, with gains upwards of +2% in the U.S., just above those in Asia, while European REITs fell back just slightly. Domestically, health care and residential real estate led the way, followed by decent gains in retail (perhaps from an oversold condition), while more the more cyclical lodging group continued to take a breather.

Commodities fell back slightly on the week, with energy and industrial metals largely flat, precious metals higher and agriculture falling back. Crude oil moved a fraction of a percent higher, ending a penny below $54/barrel, based on higher reported inventories.

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 21, 2017.

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