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Weekly Review - December 2, 2017

Weekly Review - January 2, 2018

Guest Post - Tuesday, January 02, 2018

Summary

With an extremely light holiday calendar for economic data, highlights included stronger housing and regional purchasing data and weaker consumer confidence and jobless claims.

U.S. stock markets fell during the last week of the year, while international equities gained with the help of a weaker dollar. Bonds fared well as interest rates declined for the week, and foreign bond markets also benefited from the dollar’s move. Commodities across the board experienced a positive week.

Economic Notes

(+) The December Chicago PMI rose +3.7 points to 67.6, the highest level in six years. Output and demand were both strong for the month, where both rose to multi-year highs, as did the level of new orders. Interestingly, the production indicator reached a level last seen over three decades ago. On the other hand, employment and supplier deliveries fell a bit from the prior month. Overall, this is a very solid report which reiterates recent trends of manufacturing strength.

(+) The October S&P/Case Shiller home price index for October came in showing an increase of +0.7%, which outperformed the median forecast calling for +0.6%. All cities in the index experienced gains, led by Las Vegas and San Francisco; however, it appears seasonal adjustments may be playing a role in recent month-to-month numbers. On a year-over-year basis, the index increased +6.4%, which remains extremely strong.

(+) Pending home sales for November rose +0.2%, which outperformed expectations of a -0.4% decline for the month. The Northeast region gained most sharply, at over +4%, while the West fared worst, down -2%; gains in the Midwest and declines in the South were more modest and offset each other to result in the overall tempered reading.

(-) The advance goods trade balance for November widened to -$69.7 bil., versus expectations for a minor tightening to -$67.9 bil. Within the report, exports rose +3%, led by strength in autos, consumer and other capital goods. Imports also gained +3%, with strong readings in industrial supplies and consumer goods.

(-) The Conference Board index of consumer confidence fell -6.5 points to 122.1, compared to an expected more modest decline to 122.1. Perceptions of present economic conditions actually rose slightly by nearly +2 points, while expectations for the future deteriorated by nearly -12 points. The labor differential which measures ease in finding employment, ticked down barely.

(x) Initial jobless claims for the Dec. 23 ending week were unchanged at 245k, which was higher than the expected minor drop to 240k. Continuing claims for the Dec. 16 week rose by +7k to 1,943k, which was much higher than the 1,900k forecast by consensus. Overall, though, levels remain low and could be affected somewhat by seasonal adjustment factors and holiday employment more than usual.

Market Notes

Period ending 12/29/2017

1 Week (%)

YTD (%)

DJIA

-0.14

28.11

S&P 500

-0.33

21.83

Russell 2000

-0.42

14.65

MSCI-EAFE

0.94

25.03

MSCI-EM

1.52

34.35

BlmbgBarcl U.S. Aggregate

0.51

3.54


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

12/22/2017

1.33

1.91

2.26

2.48

2.83

12/29/2017

1.39

1.89

2.20

2.40

2.74

U.S. stocks experienced a low-volatility last week of the year, resulting in a net decline in prices. From a sector standpoint, utilities and industrials gained the most ground, while tech stocks pulled back by a percent, affected a bit by demand concerns for Apple’s new iPhone.

The dollar fell back by a percent, which acted as a strong tailwind for both developed and emerging market equities. U.K. stocks were especially strong with positive online shopping results, while European and Japanese stocks actually lost ground for the week in local terms; however, the currency translation on the latter two regions turned the negative into a positive result for U.S. investors. Emerging market outperformance was highlighted by gains in non-China Asian regions, such as Korea, Malaysia and Indonesia, although most nations benefited from the weaker dollar to some degree and stronger commodity prices. Chinese growth looks to be slowing again as we enter the new year, which always seems to result in a mixed bag for markets. On one hand, as the global growth engine of recent years, a slowing economy equates to likely slower world GDP growth; at the same time, a more tempered pace of growth has spurred the government to work on reducing internal leverage and high debt levels, perhaps lowering the chances of a crisis.

U.S. bonds fared well for the week, with yields falling all along the curve. As expected, long-term government bonds fared best, due to the duration effect, while corporate credit also fared well on the investment-grade side; high yield bonds experienced more tempered gains. Foreign bonds declined slightly in local terms for developed markets, while gaining a bit in emerging markets; however, a falling dollar pushed both sharply higher for the week.

Real estate gained over a percent in the U.S., outperforming Asia by a bit but sharply underperformed Europe and the U.K. for the week—the latter closing out the year with gains well over +20% to lead all segments. In the U.S., retail/regional malls fared best, which helped trim their losses for the year, keeping the group in last place for 2017, while lodging pulled back somewhat on the week.

Commodities generally gained, with the influences of a stronger dollar, an oil pipeline explosion in Libya, and bitter cold weather across the country—all of which boosted demand and pricing for the energy sector, particularly natural gas. West Texas crude ended the week up several percent to $60.42, the first over-60 close since June 2015, and representing roughly the high point of the $40-60 trading range for oil that has dominated the market since the substantial drop in price in late 2014. Interestingly, the one week +10% boost in natural gas spot prices helped temper a much uglier year-to-date loss to -20%, caused by high supplies and warmer weather predictions. Futures prices fared almost twice as bad, which is another reminder of the common divergence of spot and investible futures prices.

Our normal quarterly asset allocation update will describe performance in greater detail, but there appeared to be little to complain about in 2017 from an investment standpoint. Equity markets were positive around the world, with foreign markets dominating those in the U.S., especially with strength from improving conditions in emerging markets. Bonds also fared decently, to the surprise of some, with some volatility in interest rates helping the low coupons of treasury debt, and credit spreads continuing to contract provided a boost to corporate bonds of all types—both investment-grade and high yield. Real estate securities in the U.S. provided positive, but sub-par returns compared to broader equities, although foreign REITs fared extremely well to buck the trend of recent years. Commodities also provided positive returns, with strength in the energy and industrial metals sectors, although precious metals contributed as well.

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 26, 2017.

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