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Weekly Review - March 27, 2017

Weekly Review - March 27, 2017

Guest Post - Monday, March 27, 2017

Summary

In a lighter week for economic data, durable goods and housing data were mixed, while jobless claims rose due to winter weather in parts of the country.

U.S. stocks declined in line with political disappointments surrounding health care reform, while foreign equities were helped somewhat by a weaker dollar. Bonds fared well as flows moved away from risk and interest rates declined, with foreign outperforming domestic. Commodities declined generally with weakness in crude oil prices due to supply concerns.

Economic Notes

(0/+) Durable goods orders for February rose +1.7%, outperforming an expected +1.4% increase. Core orders, however, declined -0.1%, which disappointed compared to a forecasted gain of +0.5%—the divergence was due to aircraft to some extent—however, the prior month's core orders were revised up slightly. Core shipments rose +1.0%, which strongly outperformed expectations of just a slight increase.

(0/-) The FHFA house price index for January was flat, which disappointed a bit relative to a +0.4% increase expected. Increases were seen in two-thirds of U.S. regions, led by the Pacific and Mountain segments, while East South Central (KY south through AL/MS) fell by -2% on the negative side. Year-over-year, the index continued its pattern of strong gains, up +5.7%, which compares favorably from a historical standpoint.

(0) Existing home sales for February fell -3.7% to 5.48 mil. seasonally-adjusted annualized units, a bit below forecasts calling for a -2.5% decline, following a new recovery peak the prior month. Single-family dropped by -3%, but the headline figure was more affected by a -9% decline in condos/co-ops, which tends to be a smaller proportion of the total. Regionally, the South experienced gains of just over +1%, while the Northeast and Midwest experienced substantial declines. Year-over-year, sales are +5.3% higher, and inventories continue to appear relatively tight, having fallen -7% from a year ago to a level of 3.8 months supply. While rates have not dramatically moved higher, there is some chatter among economists surrounding the impact of rising rates upon mortgage demand, which, in turn, could translate into housing pressures.

(+) New home sales rose in February by +6.1% to a seasonally-adjusted 592k units, which surpassed expectations for about a +1% gain; however, there were slight negative revisions for some prior months. Regionally, all areas experienced gains except the Northeast, which saw a decline; however, some of these may have been weather-related, as is common in Feb. Inventory here, too, fell -0.2 to a level of 5.4 months supply. From a historical perspective, however, new home sales are running at just over half of what can be interpreted as 'normal', as measured by levels seen at the turn of the new century, while existing home sales appear far stronger.

(0) The current account balance for the 4th quarter of last year improved by nearly $4 bil. to -$112.4 bil., far tighter than the expected -$129.0 bil. The trade deficit had widened by $16 bil., however this was offset by nearly $20 bil. in primary income, which in this case was due money movement of legal settlements.

(0) Initial jobless claims for the Mar. 18 ending week ticked +15k higher to 258k, which came in above expectations calling for 240k. Continuing claims for the Mar. 11 week fell by -39k to an even 2,000k, which was below the expected 2,040k. It seems that winter storm activity in the eastern U.S. may have been the catalyst for the rise in initial claims, due to the states involved with higher claims.

Despite the not-uncommon weather-related uptick, these levels remain extremely low, which is a positive for labor market activity. There have been a variety of recent reports written by economists describing the 'missing' workers—notably men of lower-to-moderate education levels that haven't been actively looking for work and so aren't counted in most official government labor statistics (if they were included, it would lift the unemployment rate higher). Reasons for the lack of employment are myriad, including those left behind by technology without skills needed to new economy jobs (in many cases, computers/robots are more to blame than China in terms of job losses), as well as reasons not as often discussed, such as disability, caring for family members, felony convictions and addictions (which appears again to be a growing problem). While many of these are societal issues as much as economic, it trickles down to the fact that it may be increasingly difficult to re-integrate these folks back into the work force, so the labor 'slack' the Fed has been fighting could be more structural than cyclical. Such a realization could push rates further upward, while the continued view that cyclical factors are at play could dampen the pace of rate increases.

Market Notes

Period ending 3/24/2017

1 Week (%)

YTD (%)

DJIA

-1.52

4.85

 

S&P 500

-1.42

5.20

Russell 2000

-2.63

0.09

MSCI-EAFE

-0.04

7.25

MSCI-EM

0.37

12.39

BarCap U.S. Aggregate

0.60

0.75

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

3/17/2017

0.73

1.33

2.03

2.50

3.11

3/24/2017

0.78

1.26

1.93

2.40

3.00

U.S. stocks declined on the week relatively early, with some weakening in sentiment related to concerns over legislative efforts in Obamacare 'repeal and replace', which ended up being pulled back from a vote for the time being. This issue as well as tax reform had become more contentious and are raising concerns that the Trump agenda will take longer than many initially expected. On Tuesday, the S&P experienced its first -1% in over 100 days, which was one of the longest stretches of low vol for some time. All S&P sectors lost ground during the week, except for utilities, which gained over a percent, while financials fell back sharply.

In recent months, the obvious story has been the 'Trump rally', which was dependent initially on a pro-business agenda being pushed through successfully. Now that this has transitioned to the nitty-gritty of actual back-room political work, investors have become a bit more finetuned in their assessments of the magnitude and timing of legislative success. First up was healthcare reform, which has traditionally been a difficult issue for several Presidents going back at least several decades, requiring a great deal of political capital, and sub-optimal outcomes. While this appears to be a much longer runway than first imagined, how different this outcome will be is a key concern for not only healthcare companies whose profits depend on healthcare demographics and payments, but other industries, based on the political momentum built up or lost during this process. No doubt, this will be a long running saga, as it always is with new administrations.

With a weaker dollar, developed market foreign returns improved from negative to flattish/slightly positive in several key markets, with Europe outperforming during the week. Continued concerns over upcoming elections and a British terrorist attack kept sentiment tempered; however, stronger economic data was a catalyst for some improvement later in the week. Emerging markets, however, generally outperformed for the week, widening their year-to-date lead with stronger economic results in several locations and likely a sentiment boost from hoped-for difficulty in Trump's agenda making significant headway.

U.S. bonds ended up with a positive week, as flows moved away from risk, and interest rates fell back by about 10 basis points across the yield curve. As expected, long-duration governments ended up with the strongest performance, while government bonds and investment-grade credit performed generally in line. High yield corporates and bank loans, however, pared back as risk assets were less in favor and rates fell. Foreign bonds gained in line with domestic bonds in local terms, with transformed into a much stronger week when the weaker dollar was translated in.

Real estate was generally flattish on the week in the U.S., while Asian and European real estate outperformed by a bit, in line with broader equities. Healthcare REITs outperformed domestically, with returns into the low single digits, while lodging/resorts declined by a similar amount.

Commodities were down for the week, in spite of a usually-helpful weaker dollar. Precious metals ended the week as the only category in the positive, while crude oil declined -2.7% to just under $48/barrel by Friday, as continued concerns surrounding over-production and high existing supplies kept prices contained. Interestingly, the Baker Hughes rig count has risen every week so far this year, except for one, which just intensifies market concerns about upcoming inventory build-up.

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 March 20, 2017.

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