The H Group Blog

Investment and Financial Planning news from some of the best in the business.

Weekly Review - June 27, 2016

Weekly Review - June 27, 2016

Guest Post - Monday, June 27, 2016


Most global attention was focused on the U.K. 'Brexit' referendum, which was assumed to be doomed to failure earlier in the week—until final results showed it passed by a small margin. In a slower week for U.S. economic releases, housing results were mixed, with home prices higher but building activity lackluster.

Equity markets gained ground early in the week globally as concerns over 'Brexit' dissipated before actual voting but reversed as results came through, causing a broad sell-off of risk assets. Bonds fared well in the week in response, and commodity markets declined with oil and agricultural futures falling back as well as a stronger U.S. dollar.

Economic Notes

(-) Durable goods orders for May fell -2.2%, which underperformed relative to the -0.5% decline expected. This was mostly due to the more volatile transportation segment falling -6%, although core capital goods also declined nearly -1% with weakness in other areas as well. Core shipments also fell, by -0.5%, although some prior month revisions were additive. This report reflects continued challenges in the manufacturing sector, consistent with other recent data.

(0/+) The FHFA house price index rose +0.2% in April, which underperformed the +0.6% expected, but does represent 51 consecutive months of gains—a decent streak to say the least. The largest gains occurred in the New England region as well as the upper Great Plains states, while the mid-Atlantic and mountain west regions fell slightly. Year-over-year, the index is up +6%, which represents strong growth on the residential side.

(0) Existing home sales in May rose +1.8% to an annualized and seasonally-adjusted 5.53 mil. level, which was on target with expectations to end up at a post-recession peak. Single-family and multi-family were both up nearly equivalent amounts, within a few tenths of each other. Regionally, the Northeast, South and West all saw gains in the 4-5% range, while the Midwest declined about -7%. Inventories remain tight, with average days on the market declining from 40 a year ago to 32—this tightness has no doubt has played a role in house price indexes moving higher.

(-) New home sales for May fell by -6% to 551k on a seasonally-adjusted basis, which underperformed relative to the expected 560k level, and represented a normalization of last month's gains, which were revised down somewhat in this release (this series is volatile month-to-month and prone to revision). By region, sales were lower in the West (the biggest laggard), Northeast and South, while sales in the Midwest rose a bit. Year-over-year, sales are up +9%, which is the more important trend. As we've noted previously, sales remain weak for a number of cyclical and perhaps economically structural reasons (this was the weakest May in 25 years on a non-seasonally adjusted basis), but building in 'inventory' has been improving somewhat—perhaps indicating a greater degree of caution by builders.

(-) The final May Univ. of Michigan index of consumer sentiment came in at 93.5, which represented a decline from the initial reading (and consensus estimates of the final) of 94.1. Consumer expectations for the future as well as assessments of current conditions each fell about a point. Inflation expectations for the coming 5-10 years rose +0.3% to 2.6%, which was more of a normalization from the all-time lows recently reached, as expectations for extreme high inflation outcomes actually fell. All-in-all, sentiment remains relatively strong and near recovery highs.

(-) The Conference Board's index of leading economic indicators for May fell by -0.2%, following several months of increases. The change was mostly due to an increase in initial jobless claims (which has since reversed), while positive contributions came from yield spread, credit, manufacturing orders and building permits. Over the last six months, this indicator has come in flat after rising +1.2% over the prior six months, so growth has decelerated as various indicators have weakened. The coincident measure was flat for the month while the lagging indicator rose by +0.3%.

Interestingly, history tells us that, on average, the index of leading indicators peaks about a year and an half prior to a recession. There is some variability around this average for the index as a whole, as well as variability within its underlying components. While the broader index appears to still be chugging along, about half of its 10 components look to be weaker. While these point to increased downturn risks, forecasting recessions has always been a difficult proposition with a high error rate.

conference board graph

(+) Initial jobless claims for the June 18 ending week fell to 259k, below the expected 270k. Continuing claims for the June 11 week came in at 2,142k, which was also below the expected 2,150k. For the single week, a decline in claims from California was the primary driver, reversing a spike in claims from the same place the prior week. Both measures remain near recovery low levels, which is positive news for labor markets.

(0) Janet Yellen's semi-annual testimony to the Senate Banking Committee was similar to remarks elsewhere—to no one's surprise. The implication was that the FOMC remains data-dependent, but her comments showed confidence in labor and inflation targets being reached over the next few years. That's a longer timeframe than what was indicated in commentary not that long ago, but in keeping with a lack of policy action. Interestingly, it appeared the Q&A session focused on structural issues such as technology change and the impact on employment, issues we've discussed at length (yes, the robots taking over), as well as if the Fed had the legal authority to take on a negative interest rate policy—it appears they do, but she stated this is 'low on the list of options'.

Read the "Question of the Week" for June 27, 2016:

Now that the U.K. is leaving the EU, what now?

Market Notes

Period ending 6/24/2016

1 Week (%)

YTD (%)





S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















Stocks rose early in the week as global concerns over Brexit dissipated, until Friday, when the actual voting resulted in a surprise win. From a sector standpoint in the U.S., every industry ended in the negative, with utilities, energy and consumer staples earning the smallest losses, and financials, materials and cyclicals suffering the worst with declines over -2% for the week.

Foreign stocks in Europe unsurprisingly experienced the most negative returns, but the bulk of the net damage was due to a gain in the U.S. dollar, as local market results were flat to even positive on net. The U.K. and Europe were both down -10% on Friday, which offset gains earlier in the week from the premature relief rally—the financial sector performed significantly worse. In terms of one-day market reactions, this was significant. The British pound took a severe pounding, pardon the pun, in fact, reaching its lowest value against the dollar in 30 years, but much of this was less severe than it seemed due to same run-up in prior days. Peripheral European stocks in Greece, Italy and Spain suffered much more due to the resulting uncertainty about the EU's durability. Emerging markets were surprisingly less affected, with generally flattish results on net. In asset allocation portfolios, European/U.K. financials have not been significantly held due to embedded risks, in favor of consumer firms with growth prospects that tend to be a bit more macro-agnostic.

U.S. bonds fared decently, as rates declined in response to the sell-off in risk assets, which benefitted both government and corporate bonds. The 10-year Treasury note temporarily fell below the 1.5% level, the lowest yield in four years, which continues to defy expectations of a gradual move upward. Foreign bond yields also fell both developed and emerging nations as investors embraced fixed income. In the U.K., the 10-year gilt reached an all-time low of just over 1.0% while German and Japanese bond yields fell deeper into the negative upon high buying interest.

Real estate in the U.S. and Asia was generally unaffected by global events for the week, with minimal losses, while Europe lost ground.

Commodities declined generally due to the flight from risk on Friday, with broad indexes down a few percent. As expected, precious metals ended in the positive for the week, with investor seeking the perceived safe haven of gold, while industrial metals also gained. After reaching $50 again earlier in the week, crude oil pulled back to $47-48 range. Agricultural commodities also lost ground with large drops in corn, wheat and soybeans due to weather changes and an unwinding of some speculative activity.

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 June 20, 2016.

Trackback Link
Post has no trackbacks.

* Required

Subscribe to: The H Group SALEM Mailing List


Recent Posts