The H Group Blog

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

Weekly Review - March 19, 2018

Weekly Review - March 27, 2018

Guest Post - Tuesday, March 27, 2018

Summary

Economic data for the week included an increase in the short-term interest rate by the Federal Reserve, as well as stronger durable goods orders and leading indicator results. Housing and jobless claims results were mixed to some degree.

Global equity markets declined due to a variety of negative inputs, including fears of a widespread deterioration in global trade conditions. This pulled the dollar down by nearly a percent, helping temper losses for foreign stocks. Bonds ended the week slightly higher, as interest rates tempered a bit, with foreign outpacing U.S. Commodities gains on the heels of a sharp move higher in the price of crude oil.

Economic Notes

(0) As noted in the earlier piece, the FOMC meeting resulted in a +0.25% increase in rates to 1.50-1.75%. The tone of the ‘dot plot’ and comments in the subsequent press conference were taken to imply an unchanged expectation of three interest rate hikes this year, one additional for 2019 for a total of three, and a few in 2020. Little else was changed, with some comments implying a stronger pace of economic activity, while it was tempered a bit elsewhere. Inflation commentary and expectations were unaltered, with estimates remaining near the 2% target in coming years. It seems a consensus of well-followed economists, however, are of the thinking four rate hikes this year are more likely than three.

(+) Durable goods orders for February rose +3.1%, which outperformed the +1.6% increase expected. Much of the increase occurred in the headline figure, with defense goods rising over +15% and aircraft orders up +25%. Removing these more volatile components, core capital goods orders rose +1.8%, beating expectations calling for +0.9%. Core capital goods shipments gained +1.4% as well. This is a sporadic series, but the year-over-year increase of +9% signifies a continued improvement in trend growth over the past several years.

(+) The FHFA house price index for January showed a gain of +0.8%, which was twice the anticipated +0.4% increase. Prices rose in all but one of the nine national regions, with New England and the Pacific states gaining over +1% for the month. The year-over-year rate of change ticked up to +7.3%, which is the strongest 12-month rate in five years.

(+) Existing home sales for February rose +3.0% to a seasonally-adjusted annualized rate of 5.54 mil. units, in a rebound from the prior month and beating expectations calling for a less dramatic +0.4% gain. Single-family units rose +4% to lead the way, while the smaller condos/co-ops category fell just short of -7%. Regionally, the West and South experienced gains, while the Northeast and Midwest saw declines—these dispersions were likely weather-related. Year-over-year gains were just over +1%, while total single-family homes for sale has declined -7% over the same period, along with shorter listing periods—this phenomenon of lower inventory has no doubt played a role in the weakness of residential real estate sales. At the same time, mortgage application activity has been picking up.

(0) New home sales in February fell by -0.6% to a seasonally-adjusted annualized rate of 618k, which disappointed relative to expectations calling for little change. On the positive side, revisions for prior months added a significant number to sales numbers for the past several months. Regionally, the Northeast and South experienced sharp gains, while the West fell most notably. Nationally, the sales result represents a mere +0.5% gain over a year ago. Available inventory ticked up a notch to 5.9 months supply, near a high point for the year.

(+) The Conference Board’s Index of Leading Economic Indicators rose +0.6% in February, continuing a five-month positive streak of consecutive monthly increases of similar magnitude. Gains for the month were led by positive contributions in almost every area, aside from building permits and stock prices. For the trailing 6 months, the LEI rose at a +8.2% annualized rate, far surpassing the +4.8% rate of the prior 6-month period. The strength can be seen visually in the graphic below.

The coincident economic indicator rose +0.3% and the lagging economic indicator gained +0.4% for the month. These represented a +3.0% annualized growth rate for the coincident indicator and just under for the lagging. In keeping with recent months, these indicators continue to show the economy running at a strong upward trajectory.

The Conference Board Leading Economic Index for the United States

(+) Initial jobless claims for the Mar. 17 ending week rose slightly by +3k to 229k, to just a tick higher than the median forecast of 225k. Continuing claims for the Mar. 10 week fell sharply, by -57k, to 1,828k—below the 1,870k level forecast and the lowest level since the early 1970’s. No unusual data was reported by the DOL. As we seem to report every week as of late, this data remains extremely strong, pointing to low layoff activity and a tight job market nationwide.

Market Notes

Period ending 3/23/2018

1 Week (%)

YTD (%)

DJIA

-3.68

-2.56

S&P 500

-5.93

-2.76

Russell 2000

-4.77

-1.41

MSCI-EAFE

-2.58

-2.54

MSCI-EM

-3.38

1.18

BlmbgBarcl U.S. Aggregate

0.03

-1.97


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2017

1.39

1.89

2.20

2.40

2.74

3/16/2018

1.78

2.31

2.65

2.85

3.08

3/23/2018

1.74

2.28

2.61

2.82

3.06

U.S. stocks experienced another bout of negative volatility with several events conspiring to pull down investor sentiment. Early in the week, the tech sector took a hit especially, with FANG component Facebook falling over -10% after concern over data from 50 million users was gathered in appropriate by a third party firm for political purposes. The firm was slow to address the incident and any changes in policy, while some observers were calling for a boycott. The FOMC meeting offered no surprises in policy, but tone of new Chair Powell—noting heightened sensitivity to inflation (nothing new)—was being more carefully scrutinized for how the new regime may differ from the Yellen Fed. Congressional leaders (and finally the President) agreed on stopgap measure to avoid a government shutdown until at least Sept., although this was not in the news as much as prior bills of this type.

The key catalyst for market worry appeared to be trade war talk to combat China’s ‘aggression’. The administration authorized tariffs on at least $50 billion worth of imported Chinese goods, with comments of ‘more to come’ pushing market sentiment sharply lower. The key uncertainty was how China will respond, after mentioning similar rhetoric and tariffs targeting U.S. exports. Another wrinkle was the turnover of several White House staff (again), including the National Security Advisor and President’s personal attorney. As we’ve noted before, uncertainty and open-ended negative possibilities are inputs that markets can’t stand—with a resulting -5% decline.

From a sector standpoint, energy fared best, with minimal losses under -1% and buoyed by higher oil prices, while technology and financials suffered the most, down over -7%.

Foreign stocks fared better than U.S. equities in local terms, but especially after considering a -1% drop in the dollar. Emerging markets fared better, with lesser dollar impact, but only a loss of just over -1% for the week. European stock sentiment was largely driven by U.S. tariff talk, although several exemptions were already given to key industries. This problem of potential impact on global growth could become a self-fulfilling prophecy if a stronger euro negatively pressures European exports. PMI numbers also fell off a bit in Europe, causing some to question the current sustainability of growth. Emerging markets were mixed, with more volatile returns in nations potentially affected by U.S.-China trade tariffs but strength in markets benefitting from higher oil/commodity prices as of late.

U.S. bonds gained a bit during the flight away from equities, as interest rates across the yield curve ticked down. However, the fact that the decline was not more pronounced is perhaps a testament to a new higher bar for yields, as a reflection of stronger economic growth. Government bonds outperformed investment-grade corporates, as spreads widened. Foreign bonds in developed markets experienced slightly better gains, while a significantly weaker dollar elevated index gains to well over a percent for the week. Emerging market bonds gained slightly, with lesser USD effects.

Real estate returns were negative across the board in the U.S., but were sector-dependent and lost ground to a lesser degree than broader equity markets. Mortgage REITs suffered less with lower interest rates, and non-U.S. real estate indexes were aided by a weaker dollar. Cyclically-sensitive office/industrial and lodging suffered the most dramatic losses for the week, as expected. Year-to-date, real estate remains one of the more pressured asset classes, due to expectations for higher interest rates, still-tempered inflation as well as additional supply picking up in a few key office markets.

Commodities generally gained a few percent on the week. Energy rose +5% on the heels of oil, while natural gas lost ground. West Texas crude oil prices marched steadily higher during the week to end at $65.88, nearing highs from late January. The impetus was a weaker dollar, concerns over a more hawkish U.S. foreign policy with the administration’s change in the National Security Advisor, as well as Saudi comments that OPEC production cuts could be extended into 2019. Industrial metals lost a few percent, along with broader paring back of risk in global equity markets, which helped precious metals returns gain a few percent.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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 March 19, 2018.

Trackback Link
http://www.thehgroup.com/BlogRetrieve.aspx?BlogID=17607&PostID=1522089&A=Trackback
Trackbacks
Post has no trackbacks.

* Required





Subscribe to: The H Group SALEM Mailing List

Archive


Recent Posts