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Weekly Review - January 22, 2018

Weekly Review - January 22, 2018

Guest Post - Monday, January 22, 2018


Economic data for the week was mixed, with decent results reported in industrial production, while regional manufacturing results, housing starts and consumer sentiment came in weaker. The Fed's anecdotal Beige Book showed general strength across most segments of the U.S. economy.

Equity markets in the U.S. rallied for yet another week, with continued strong economic data, despite a more dramatic political backdrop. Stronger global growth and a weaker dollar propelled foreign stocks to another week of leadership. Bonds lost ground as interest rates rose for a variety of reasons, while commodities declined along with a pareback in crude oil prices.

Economic Notes

(-/0) The New York Fed's Empire State manufacturing survey ticked down by -1.9 points in January to +17.7, from an expected lesser decline to +19. Underlying components of employment, shipments and new orders all declined significantly, but still remain solidly expansionary, as does the overall index—weather could have played a role.

(-) The Philadelphia Fed index fell -5.7 points for January, to a level of +22.2—below that of the expected +25 reading. Like the Empire state survey, subcomponents were generally weak, with declines in employment and new orders; however, shipments rose. Overall, though, the index level continues to signify expansion.

(+/0) Industrial production for December rose by +0.9%, beating forecasts calling for a +0.5% increase. However, the economic cycle-dependent manufacturing production component gained a meager +0.1%, with the bulk of gains resulting from weather-sensitive utilities production (which rose +6%) as well as mining (which includes petroleum extraction). In the manufacturing segment, auto production was a high point, rising +2% for the month, while business equipment rose just a few tenths of a percent. Capacity utilization rose +0.7% to 77.9%, which is a historically high level.

Interestingly, industrial production is one of the longer-standing manufacturing metrics, with nearly a century of history. As the U.S. economy has morphed from a manufacturing-based to a service-oriented one, metrics like these can be less impactful to some degree, but continue to be useful in spotting trends and turning points in economic cycles. What's very obvious from the charts below is the pattern of more tempered boom and bust cycles in recent decades, as measured from a year-over-year change basis—as the economy has become less cyclical generally. While positivity tends to go along with good times, we can see that declines took hold in 2015-16, so mid-cycle slowdowns are also not unusual. The second chart represents a long-term view, where the impact of the Great Recession is quite profound, but upward progress since has looked a lot more 'normal'.

(-) Housing starts for November fell -8.2% to a seasonally-adjusted level of 1,192k, far below the -1.7% decline expected. Single-family starts fell by -12%, which outweighed the +1% increase in multi-family. Regionally, starts declined in all areas, led by the South at -14%. Building permits, on the other hand, only fell -0.1% on the month, which was stronger than the expected -0.6% decline. Single-family permits rose +2%, while multi-family fell by -4%. By region, permits in the Northeast gained substantially (over +40%), followed by a -11% decline in the South. It appears severe weather may have played a role in the weak month, and will likely impact December and beyond as well; extremes can lead to severely weak months and subsequent bouncebacks, which can be challenging for seasonal adjustments to adequately capture.

(0) The January NAHB homebuilder index ticked down by -2 points from a cycle high in December to 72, which was as expected. Current sales, future sales expectations and prospective buyer traffic all declined for the month, with the latter category falling the most. Regionally, the Northeast gained nearly ten points, while the Midwest declined the most for the month. Despite the drop, homebuilder sentiment levels remain high for the cycle—near levels around the last cycle peak.

(-) The Univ. of Michigan consumer sentiment index fell -1.5 points to a six-month low of 94.4 in the preliminary January report, contrary to an expected small gain to 97.0. Consumer assessments of current conditions fell by nearly -5 points, while expectations for the future ticked up slightly. Inflation expectations for the coming 12 months rose a tenth to 2.8%, as did those for the coming 5-10 years to 2.5%—both of which are on the higher side for the past year.

(0) Initial jobless claims for the Jan. 13 ending week fell by -41k to 220k, far below the 249k level expected and reaching a new 45-year low for the series. Continuing claims for the Jan. 6 week, on the other hand, rose by +85k to 1,952k, higher than the 2,870k expected. The DOL reported no anomalies, but it's possible (and likely) weather could have played a role.

(+/0) The Fed Beige Book, which summarizes conditions in an anecdotal way across the various regional Fed districts for December through early January, continued to show modest-to-moderate growth generally, with a few areas upgraded a bit from the prior report in November. Stronger conditions were noted in consumer spending, where retail sales were better than first hoped; however, auto sales were mixed and real estate continued to suffer from a constrained supply. Manufacturing also strengthened, as seen in a variety of broader reports, with some signs of capital spending picking up. Labor conditions, in keeping with broader economic results, remained robust with a few pockets of shortages for skilled labor, although no outright shortages and sharp wage spikes at this point. Otherwise, inflation continued to be described as 'modest to moderate'. All-in-all, on the economic side, there continues to be very little to complain about—except the potential for overheating at some point.

Market Notes

Period ending 1/19/2017

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U.S. stocks gained for yet another week, with consumer staples and healthcare leading the way, while energy and industrials lagged, with losses. With a few earnings reports in, earnings continued to surprise on the upside, albeit to a lesser degree than expected; revenues, on the other hand, did surprise on the higher side somewhat. Interestingly, FactSet lowered their estimates of earnings growth for Q4 due to lower expectations in the financials sectors, while other industries are expected to see growth year-over-year to some degree.

The specter of a government shutdown on Friday (which came to fruition Friday night in time for the weekend) didn't seem to cast too long of a shadow over markets, which could be getting used to the ongoing political theatre of such debates (there have been over a dozen shutdowns since the 1970's, with five days being the average duration). Some economists who evaluate the issue don't see much of an impact, assuming it's short-lived. However, a longer-standing stalemate could begin to weigh on consumer and business confidence and spending, with the potential impact of subtracting 0.2% or so from GDP per week, on an annualized basis. The drawback in finding a short extension for another month, unfortunately, is that it puts the spending extension in roughly the same time period as the deadline for raising the debt limit. This offers the potential for more severe market drama, with more at stake.

Foreign stocks performed just below the level of domestic stocks of the week, with similar gains in Europe and Japan, with a weaker dollar pushing returns over the top. Japanese stocks were helped by PMI readings reaching their highest levels in four years, while corporate sentiment improved in Europe. Emerging markets fared better, led by Brazil, Mexico and South Africa—which are commodity-oriented nations—as broader economic growth appears stronger. Chinese growth represented a good part of this, with GDP rising on an annual basis (to +6.8%) for the first time this decade, as trends toward slowing growth have been the norm, and are expected to continue.

U.S. bonds lagged as treasury yields moved higher for the week—both as a byproduct of stronger economic growth but also technical asset flows out of U.S. markets on the week due to political uncertainty surrounding the magnitude of the government shutdown. High yield credit fared better, with minimal losses, while floating rate bank loans gained. Foreign bonds in both developed and emerging markets rose slightly in local terms as yields declined, but were helped more significantly by a weaker dollar.

Commodities lost ground for the week, with prices declining in all key groups. Energy led the way, as crude oil fell back by $1/barrel to end the week at $63.31. The key catalyst was a report from the U.S. Energy Information Administration, which predicted that higher shale activity would cause domestic production to rise above 10 million barrels/day—not seen since the early 1970's.

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 16, 2018.

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