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Weekly Review - July 24, 2017

Weekly Review - July 24, 2017

Guest Post - Monday, July 24, 2017

Summary

Economic data for the week was mixed, with several regional manufacturing surveys showing weaker yet still expanding metrics, but strong housing starts and monthly index of broad leading indicators.

Equity markets gained globally, with emerging markets outperforming developed markets. Bonds also fared well, with interest rates declining worldwide amidst dovish central bank language and weaker inflation. Commodity indexes fell overall as oil prices declined a bit for the week, offset partially by a rise in gold.

Economic Notes

(-) The NY Empire State manufacturing survey fell -10.0 points to +9.8 for July, which disappointed relative to an expected +15.0 level. Key sub-components showed similar drops, in new orders, shipments and employment, although all remained expansionary. Even though the levels weren't as high as in June, this index continues to point to solid manufacturing growth.

(-) The Philadelphia Fed survey for July showed a similar decline of -8.1 points to a still very elevated +19.5 level, but below the +23.0 result expected. New orders fell by almost -25 points to barely expansionary, while shipments, employment, inventories and prices paid deteriorated to a lesser degree. As noted by these and a few other economic measures, the rapid pace of manufacturing growth appears to have cooled off a bit as of late, but continues to grow.

(0) Import prices fell -0.2% for June, which fell in line with expectations; additionally, the decrease for May was revised upward somewhat. Overall, higher prices of food/beverages on the order of +1%, and a rise in capital goods prices, were offset by a -2% drop in petroleum prices and slight declines in the prices of consumer goods and autos. It appeared to be a tempered month with a few pressures up-cycle due to the food impact.

(-) The NAHB homebuilders' sentiment index for July fell -2 points to 64, an 8-month low, compared to an expected slight gain to 67. Current sales, future expectations and prospective buyer traffic all declined at least a point, all in line with the broader index. Regionally, the South and Midwest declined while the West and Northeast gained a few points. The overall trend is lower, which implies a bit of weakening sentiment for builders.

(+) Housing starts for June rose +8.3%, beating expectations calling for a +6.2% gain. The more sporadic multi-family segment was responsible for the bulk of gains, up +13%, but single-family starts also rose a solid +6%—showing a gain for the first time in a quarter. Building permits rose a similar +7.4%, which more dramatically outperformed the forecasted +2.8%. In that series, multi-family gained +14%, while single-family rose +4%. Regionally, the Midwest experienced substantial gains near +20% for June, and other regions also rose, with the exception of the Northeast, which declined nearly -15% month-over-month.

(+) The Conference Board Index of Leading Economic Indicators continued its upward trend, gaining +0.6% for June—a faster pace than that of the previous two months. The month's strength was led by positive contributions from a majority of individual component, with leaders being building permits, ISM new orders, interest rate spread and credit. For the past six months, LEI has risen at an annualized +5.0% rate, which surpasses the +3.0% rate of the prior six months. The coincident and lagging indicators each rose +0.2% for June, which was similar to the pace of the prior few months. While we like to remind that this composition consists of metrics we already know, the correlation to economic conditions has been relevant, and this overall picture remains positive (and even better, as of late).

(0) Initial jobless claims for the Jul. 15 ending week fell by -15k to 233k, stronger than the 245k level expected. Continuing claims for the Jul. 8 week, on the other hand, rose +28k to 1,977k in a reversal of the prior week, compared to 1,949k expected. No anomalies were reported, but, in the shorter term, the Independence Day holiday may have played a role in the data (as does the aftermath of many shortened weeks) in addition to summer factory retooling in industries such as auto production. Continuing claims have ticked up a bit since troughs earlier this year, but remain low.

Market Notes

Period ending 7/21/2017

1 Week (%)

YTD (%)

DJIA

-0.22

10.67

S&P 500

0.56

11.67

Russell 2000

0.50

6.55

MSCI-EAFE

0.47

16.51

MSCI-EM

1.25

22.95

BlmbgBarcl U.S. Aggregate

0.56

2.93


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

7/14/2017

1.04

1.35

1.87

2.33

2.91

7/21/2017

1.13

1.35

1.80

2.24

2.81

U.S. stocks generally rose on the week, with an absence of global macro news but benign corporate earnings reports, and several indexes reaching all-time highs again. By sector, utilities was the surprising winner, helped by lower interest rates, followed by tech and health care; industrials and energy lagged with negative results for the week.

Earnings for Q2 have begun stacking up in earnest, with results for almost 20% of the S&P having reported. Three-quarters of these reports have beaten the mean estimate on both an earnings and revenue basis (per FactSet); however, as per tradition, these include lowered expectations, especially from the energy sector, while expectations for financials have improved in recent months. Overall, the S&P earnings growth rate is right around 7% (8% overall, and 6% excluding the large bounceback experienced by the energy sector), and 12-month forward P/E stands at 17.8x, which is above the long-term average range of 15-16x. It is still relatively early in earnings season, so these early figures are likely to evolve, but full-year 2017 earnings growth is expected to be in the 8-10% range (based on who's doing the estimating), with slightly better results for 2018.

The dollar declined another percent, which helped the cause of foreign stocks, especially Japan upon a stronger yen, while the U.K. slightly positive and Eurozone local losses turned into a flat result upon a stronger euro. Early earnings trends abroad were generally a bit weaker than expected in Europe, but stronger in the U.K.

The ECB meeting concluded, with no action taken, but the commentary was more dovish than some expected and tempering sentiment from prior weeks a bit—noting, similar to the U.S. FOMC, that financial conditions tightening too quickly could slow down or jeopardize the recovery process. There's nothing especially poignant or original about that statement, but the mere comment gives markets an important message about central bank awareness and priorities.

Emerging markets gained just over a percent, leading the global group. Chinese stocks experienced decent gains, as Q2 GDP game in a tenth better than expected at +6.9%, as well as strong industrial production and retail sales numbers that are showing a bit of a rebound in the region. This has occurred despite the efforts of Chinese officials to tighten policy in order to wring out excesses in internal debt levels, especially in state-owned enterprises, which has boosted sentiment once again. At this rate, China could see the first acceleration higher in economic growth in seven years. The ongoing 'bottoming' of results in EM has certainly aided the strong advance of that segment year-to-date, leading all others. In another example, S&P raised their rating outlook on Mexico to 'stable', with the overall rating maintained at BBB+; the peso is up +20% as Trump-induced trade war fears have dissipated, while reforms and growth conditions have continued to improve.

U.S. bonds gained as interest rates declined across the curve. Investment-grade credit slightly outperformed governments, both of which outperformed high yield, which escaped with minimal gains on the week—affected by weaker energy results. Developed market foreign bonds fared well due to a weaker dollar, weaker inflation trends and dovish ECB commentary, gaining several percent for the week. Emerging market bond results were largely in line with U.S. debt with lessened sensitivity to the dollar effect on net.

Real estate fared well, in line with equities, also seemingly helped by lower interest rates. Residential REITs generally outperformed mortgage REITs. This is despite the latter performing well in falling rate periods; however, mREITs have been on a tear for the past year and appear to be suffering from a bit of profit-taking.

Commodity indexes lost ground in keeping with a weaker energy sector, although gold jumped by over +2%, helped by lower bond yields. West Texas crude fell just under a dollar, about -1.5%, to $45.77 to end the week.

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 July 17, 2017.

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