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Weekly Review - January 30, 2017

Weekly Review - January 30, 2017

Guest Post - Monday, January 30, 2017

Summary

Economic data for the week was focused on a somewhat lackluster GDP report for the 4th quarter, along with mixed durable goods data and poor housing results.

U.S. and developed foreign equities experienced gains for the week, with emerging markets gaining even more strongly. Bonds were flattish with minimal net changes in interest rates for the week, while commodities were mixed as crude oil prices changed little for the period.

Economic Notes

(-) The advance estimate of GDP for the 4th quarter showed an annualized gain of +1.9%, which disappointed relative to the +2.2% estimated consensus result. This was also a strong fall-off from the +3.5% pace of the 3rd quarter, although that was characterized by some anomalies. For Q4, personal consumption, private inventory investment, non-residential fixed investment and state/local government spending helped results (stronger capex has been a hope), while results from exports and federal government spending detracted (a stronger dollar for the quarter acted as a significant headwind in this regard). This is the first of three total releases for this quarter's GDP, as usual, so there is time for data refinement and possible improvement, but this wasn't actually too far off of expectations.

(0) Durable goods orders for December fell by -0.4% on a headline level, which was a sharp disappointment compared to an expected +2.5% gain. However, removing the more volatile components, which in this case was a sharp decline in the sporadic defense goods category, core orders gained +0.8%, compared to +0.2% expected. Core shipments also rose +1.0%, which was twice the rate expected, along with upward revisions for prior months.

(+) The advance report for the December trade balance showed a narrowed -$65.0 bil. deficit, which was not quite as wide as the -$65.3 bil. November number, not expected to change for the month. Exports gained over +3% for the month, with strength in capital goods and industrial supplies. Imports also rose, by +2%, with a boost from autos.

(+) The FHFA house price index for November rose +0.5%, which beat forecast by a tenth of a percent. Gains were seen in 7 of 9 national regions, led by the West Coast and the Southeastern U.S. Year-over-year, the index increase was +6.1%, which was similar to that of the most recent Case-Shiller housing data for the same period. The key difference is that the FHFA numbers cover a broader swath of homes beyond the 20 larger urban centers in the Case-Shiller, but only those financed with more traditional conforming mortgages.

(-) Existing home sales for December fell -2.8% to a level of 5.49 mil. seasonally-adjusted annualized units, which lagged the forecasted decline of -1.6%, although the prior month's figure was revised upward a bit. Single-family dropped by -2%, while condos and co-ops fell -10% for the month. Regionally, the South was flat, while activity in all other regions declined, led by a -6% drop in the Northeast. This time of year, weather anomalies can throw these numbers off, despite normal seasonal adjustments, as homebuying activity is typically quite restrained during the cold winter months. Interestingly, months supply declined to 3.6, which is the lowest level since the beginning of 2005.

(-) New home sales for December similarly declined, by -10.4% to 536k on a seasonally-adjusted and annualized basis. This was worse than the -1.7% decline expected, but prior month revisions higher also helped temper these results. Bad weather in the West and Midwest may have played a role for the month also, with a -41% drop in the Midwest, as well as declines in other regions. Inventory increased from 5.0 months supply to 5.8.

(+) The final Univ. of Michigan consumer sentiment index for January rose +0.4 points to a new recovery high of 98.5, compared to consensus calls for a flat reading. Consumer assessments of current conditions dropped just over a point, while expectations for the future offset this by rising just over a point. Inflation expectations for the coming year were flat from the initial report at +2.6%, while 5-10 ahead inflation expectations rose +0.2% to a similar +2.6%. Inflation readings appear to be buoyed by similar expectations for a general improvement in business conditions.

(+) The Conference Board's Index of Leading Economic Indicators for December rose by +0.5%, which was a faster rate than the minor gains of the past few months that amounted to only a few tenths of a percent. The coincident and lagging indexes each rose +0.3% for the month, so were similarly positive. In the case of the leading index, it appeared the month's results were due to positive contributions from yield spread, the stock market and consumer expectations for business conditions. For the past six months, a common baseline for the series, the leading indicators index rose at an annualized rate of almost +3% for the period, besting the first half of the year, which only rose at about a +0.3% annualized rate. Similar improvements for the coincident and lagging indicators also occurred—so we've indeed seen some acceleration in growth.

As we've said before, of course this series of indexes contains a bunch of data we already know, but seeing this data assembled from a 30,000-foot view can be helpful and has been historically helpful in spotting the direction of trends.

Leading Economic Indicators 01-30-2017

(-) Initial jobless claims for the Jan. 21 ending week bounced up by +22k to 259k, reversing several weeks of extremely low claims levels, and falling above the consensus estimate of 247k. Continuing claims for the Jan. 14 week also rose by +41k to 2,100k, which was above the 2,040k expected. No special issues were reported by the DOL, although seasonal year-end issues could persist and the state of California was responsible for over half of the initial claims increase, which could be weather-related.


Read the "Question of the Week" for January 30, 2017

Are equities getting expensive yet?


Market Notes

Period ending 1/27/2017

1 Week (%)

YTD (%)

DJIA

1.34

1.78

 

S&P 500

1.04

2.60

Russell 2000

1.40

1.05

MSCI-EAFE

1.29

3.45

MSCI-EM

2.53

6.22

BarCap U.S. Aggregate

0.04

0.06

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

1/20/2017

0.50

1.20

1.95

2.48

3.05

1/27/2017

0.52

1.22

1.94

2.49

3.06

U.S. stocks gained on the week, with the Dow reaching that 20,000 level as earlier mentioned. From a sector standpoint, materials and technology led the way with gains well over +2%, while telecom, utilities and energy lagged with negative returns for the week. Earnings results have ramped up in importance with over a hundred firms in the S&P reporting last week, with mixed results relative to expectations. President Trump also made headlines in his first week in office, with promises to dramatically reduce regulations, positive talk on U.S. energy infrastructure, and work on renegotiating trade agreements (including a departure from the Trans-Pacific Partnership).

Foreign stocks in developed Europe and Japan performed generally in line with U.S. markets, while emerging market equities outperformed—with gains in almost all key markets. Earnings in Europe have come in a bit better than expectations so far, coupled with hopes that Trump-inspired growth in the U.S. could carry over abroad, and better-than-expected GDP results in the U.K. Rhetoric from Japan points to a continued easing path, which as raised expectations for investors hoping that this stimulus will eventually lead to stabilized/higher growth prospects, as well as a weaker yen, which would be a plus for exporters. A combination of bottoming domestic conditions, some signs of optimism in developed markets and stronger commodity prices have all helped EM achieve another strong start to the year, as they did in 2016.

U.S. bonds ticked higher earlier in the week, but reversed by Friday to result in little change across the yield curve. Consequently, bond total returns were about as flat as they've been in some time for a week. Long treasuries lost about a quarter percent, while high yield corporates gained just over that same amount. Developed market foreign bonds lost ground in local terms, but were similarly flat when translated back to dollars; emerging market bonds fared a bit better.

Real estate in the U.S. lost ground for the week, while foreign REITs in Asia and Europe ended with positive gains. Domestically, pro-cyclical sectors such as lodging/resorts continued to outperform, while regional malls/retail struggled as they have for the past six months.

Commodity indexes generally lost ground on the week, with declines in gasoline prices, sharp gains in natural gas, but little change in West Texas crude oil, which ended the week a few pennies from where it started at $53.20. Both precious metals and agriculture lost ground, but industrial metals—thanks to copper—gained a few percent.

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 23, 2017.

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