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Weekly Review - January 17, 2017

Weekly Review - January 17, 2017

Guest Post - Tuesday, January 17, 2017

Summary

For the week, economic data included moderate retail sales, some gains in producer prices, stronger small business sentiment and continued strong labor results.

Stock markets were mixed on the week, with foreign equities outperforming U.S., with help from a weaker dollar. Interest rates ticked downward, which helped bonds earn slightly positive returns. Commodity returns were also mixed, as crude oil prices ended down a few percent.

Economic Notes

(-) Retail sales for December rose by +0.6%, which trailed expectations by a tenth of a percent; gains were led by results from car/truck sales as well as gasoline. Removing these more volatile elements, core/control retail sales rose a more tempered +0.2%, which was about half of the growth expected. Results were led by non-store retail/online which gained over +1%, and other areas such as furniture and sporting goods also gained; department stores, electronics and restaurants saw declines for the month.

Retail sales has become an interesting data point over the past few years, primarily due to the deepening bifurcation between sales from physical brick-and-mortar locations and online. This has become more of a newsworthy issue as of late, with headline announcements from major department stores regarding revenue struggles. The online presence of firms like Amazon, in particular, have dramatically changed the dynamic of the retail industry, which has led to recent store closure and other cut-back announcements from firms such as Macy's. It's been hypothesized that America is saturated in retail space, which can be somewhat absorbed in boom times, but online competition has created an entirely different threat, resulting in major retailers unloading peripheral non-producing real estate. However, for the most part, this isn't breaking news, so many REIT managers have been well in front of this trend for years, with more of a focus on high-quality and ‘destination' retail centers—that is, those with other tenants such as restaurants and theaters—and less so on the lower-end isolated strip mall. These have been in decline for years, for reasons beyond simply the online threat. Many of these are owned by private REITs, development companies and other investors, and generally not the public REITs seen in portfolios, which focus on more sustainably predictable and profitable assets.

(0) The producer price index rose +0.3% on a headline level, which was in keeping with expectations, led by energy prices rising almost +3% for the month. Removing the volatile food and energy components, core PPI rose +0.2%. While a few components have shown a bit more strength this year, year-over-year PPI remains at a contained +1.6%.

(+) Import prices for December rose +0.4%, which was less than the expected +0.7%. Excluding the volatile fuel component (which was up +8%), net prices fell -0.2%, led by declines in consumer goods prices. The stronger dollar may have played a role, as it often does with these measures, as it's one of the benefits of a strengthening currency.

(0/-) The preliminary Univ. of Michigan consumer sentiment index for January was little changed, at 98.1, but fell a bit short of expectations calling for 98.5. Opinions of current conditions ticked up by just less than a point, while future expectations fell by roughly the same amount, which accounted for the flat result. Inflation expectations for the coming year ticked up from a December low point by +0.4% to +2.6%, while 5-10 year ahead expectations rose by +0.2% to +2.5%.

(+) NFIB small business conditions index for December rose +7.4 points to 105.8, which took the index to its highest level in 12 years and represented the largest single month gain in its history. The largest contributor to these results was an almost +40 point gain due to those expecting the economy to improve, as well as a much larger percentage of firms that expect higher sales and believe it's a good time for business expansion. Obviously, taxes and regulations are key elements affecting small businesses, and the potential for improvement here has generally been a sentiment boost.

(+) JOLTs job openings rose a bit to 5,522k in November, which was above the 5,500k expected, and bringing the openings rate up to 3.7%. The hiring rate was flat at 3.6%, as was the quit rate at 2.1% and layoff/discharge rate at 1.1%. Overall, this is in keeping with strong labor market indicators across the board.

(0) Initial jobless claims for the Jan. 7 ending week roes by +10k to 247k, which was still less than the expected 255k. Continuing claims for the Dec. 31 week fell by -29k to 2,087k, which was right in line with expectations. While seasonal adjustment issues remain tricky at this time of year, no unusual issues were reported and overall claims levels remain low.

Market Notes

Period ending 1/13/2016

1 Week (%)

YTD (%)

DJIA

-0.39

0.68

 

S&P 500

-0.09

1.67

Russell 2000

0.37

1.13

MSCI-EAFE

0.82

2.61

MSCI-EM

1.69

3.91

BarCap U.S. Aggregate

0.20

0.37

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

1/6/2017

0.53

1.22

1.92

2.42

3.00

1/13/2017

0.53

1.21

1.90

2.40

2.99

U.S. stocks ended up mixed on the week, with large caps losing a bit of ground and small caps gaining. From an S&P 500 sector perspective, ‘growth' segments technology and consumer discretionary outperformed with stronger gains, while energy lagged with nearly a -2% decline. Healthcare continued to experience some mixed results, despite solid fundamentals, due to Trump's comments about drug pricing. With 4th quarter company earnings beginning to roll out, these could be a focus for the next few weeks.

A falling dollar, on the order of nearly -1%, mostly against the Japanese yen, boosted returns of foreign equity indexes. Emerging markets, such as Brazil, China and India generally fared better than developed markets, as improved data has raised hopes for a bottoming of cyclical conditions in these markets. This has been the story for the past year for the most part, aside from the more recent hiccup from uncertainty about Trump's trade policy.

U.S. bonds rose a bit as interest rates ticked slightly lower across the curve. As expected, despite the very small change in yields, longer duration benefited a bit more than shorter, with little difference between governments and corporates. Foreign bonds were flattish in local terms, but the weaker dollar was additive to returns for U.S. investors in almost all regions, developed and emerging.

Real estate lagged with negative returns of a few percent on the week in the U.S. and Europe, but slightly better results in Asia. Lodging and mortgage REITs continued their strong recent performance (due to expectations for improved economic growth), while the retail sector continued its struggles—per the dynamics noted earlier.

Commodities indexes were mixed for the week, despite the tailwind of the dollar decline. Crude oil dipped by a few dollars early in the week before recovering slightly to $52.40/barrel by Friday, resulting in a net decline of about -3%. The drop primarily appeared to concerns over OPEC production cuts actually taking place (perceptions vs. reality about this situation continue to be a key driver of crude week-to-week). Natural gas, however, gained due to severe weather across the nation. Other groups were generally higher, including agriculture, precious metals and, especially, industrial metals as Chinese imports increased.

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 January 9, 2017.

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