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Weekly Review - May 22, 2017

Weekly Review - May 22, 2017

Guest Post - Monday, May 22, 2017


Economic data for the week was highlighted by some mixed regional manufacturing results, stronger industrial production, a drop-off in housing starts, and jobless claims that continue to run at very low historical levels.

U.S. stocks declined during the week along with more controversy surrounding the president, while foreign equities gained due to the drop in the value of the dollar. Bonds fared well with investors seeking out safe haven assets, resulting in lower interest rates. Real estate also gained, as did commodities, with oil prices rising on the heels of extended OPEC supply cuts.

Economic Notes

(-) The Empire State manufacturing index fell several points from +5.2 to -1.0 in May, which is now just into the contractionary zone, in contrast to an expected improvement to +7.5. Components for the month included drops in new orders, shipments and employment, although only new orders actually contracted as opposed to expanded.

(+) The similar Philadelphia Fed index rose a strong +16.8 points to +38.8 for May, compared to an expected +18.5 reading. The individual components didn't show the same level of strength as the headline figure, with a slight decline in new orders and employment (although solidly expansionary), but shipments gained sharply to the highest level in over a decade. In contrast to the Empire state report, the Philly report continues to show manufacturing strength.

(+) Industrial production for April rose +1.0%, beating a forecasted +0.4% increase. The improvement was widespread among key areas of manufacturing, utilities and mining (including energy). Motor vehicle production and business equipment came in with strong gains for the month—two keys areas of special interest due to their high degree of correlation to economic growth, although autos are a much smaller part of the economy than they once were. Capacity utilization rose by over a half-percent to 76.7%, which is the highest percentage in almost two years.

(-) Housing starts for April fell -2.6% to 1,172k, disappointing compared to a +3.7% increase expected; additionally, prior month starts were revised down a bit. Single-family starts rose just under a half-percent, while multi-family, known for large month-to-month variations, declined -9%. Gains were focused on the Midwest, where starts were up over +40% in a weather-related rebound, while starts in the Northeast and South declined significantly to offset this effect. Interestingly, while the single-family starts data was disappointing on a seasonally-adjusted basis (the normal method for quoting such data), the non-seasonally adjusted results for the month were the highest in a decade. These have been on a steady upward move since troughing in 2009, albeit experiencing quite a few bumps and false starts along the way. For multi-family, it appears the series could be experiencing some 'peaking' tendencies, following a large stretch of apartment building in recent years at the expense of single-family homes. Building permits similarly disappointed, by falling -2.5% compared to an estimated minor +0.2% increase for the month. Single-family permits fell -5%, while multi-family permits were unchanged. Regionally, the Northeast and South experienced sharp declines, while the West saw gains, in keeping with the starts data. While these stats can show volatility on a month-to-month basis normally, more severe than normal weather appears to have created more variation than normal as of late.

(+) The NAHB housing market index came in +2 points higher to 70, versus an expected no change at 68. Expected future sales were the primary catalyst for the strong upward move, with current sales up slightly, and coupled with a deterioration in prospective buyer traffic. Regionally, the Northeast and West led the way, up several points, while the Midwest declined. The spring is naturally the beginning of the key home selling season, so this offers some optimism on this front.

(+) The Conference Board's Index of Leading Economic Indicators for April rose +0.3%, identical to the prior month, with contributions from eight out of the ten segments—building permits and stock prices being the detractors. This brought the increase for the past six months to a +4.9% annualized rate, which surpassed the +1.5% annualized rate for the prior six month period. The coincidental and lagging economic indexes rose an identical +0.3% for April, with a six-month pace similar to the prior six months. Overall, the index, which is a compilation of various data points with a high correlation to overall economic growth, continue to point to a trajectory of expansion, as seen visually in the graph below.

Leading Economic Indicators for April

(+) Initial jobless claims for the May 13 ending week fell -4k to 232k, again below the 240k expected. Continuing claims for the May 6 week also declined to 1,898k, which was below the 1,950k expected. No special factors were noted by the DOL, while it's interesting to note the improvement seen this year in a variety of energy-producing states. These levels remain very strong, and indicative of a full employment environment.

Market Notes

Period ending 5/19/2017

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.



















U.S. stocks ended the week lower, despite some recovery by the end of the week. Markets experienced their sharpest decline in months on Wednesday of roughly -2%, as the specter of rumors surrounding President Trump's potential intervention in FBI investigations over former national security advisor Flynn and Russia raised questions about impropriety. More than anything, this thereby soured sentiment surrounding the ability to implement promised legislation—notably tax and healthcare reforms. From a sector standpoint, defensive staples and utilities unsurprisingly outperformed, with gains, while consumer cyclicals and technology lagged with the largest losses.

The VIX, which had been hovering around its lowest levels in 20 years (below an implied volatility of 10, which is about two-thirds of historical S&P levels), shot back up briefly before settling back at around 12 to close the week. The VIX has been historically been a gauge of investor fear or complacency at extremes, but the fear spikes have tended to be quick while the periods of complacency have run for longer than expected at times, making correlations to equity movements less than perfect.

Foreign stocks in Japan and Europe also ended up with negative returns, but outperformed domestic equities when adjusted for the U.S. dollar falling -2% versus the broader dollar index. Emerging markets lagged, as stocks in Brazil were punished by over -8%, as it appeared the new 'clean' president was caught up in a potential bribery/corruption scandal, not unlike those that claimed the political careers of his predecessors. On the positive side, fiscal and structural reforms in Brazil and several other key emerging market nations seem to have taken hold, boding well for future growth and stability, aside from these periodic bumps along the road, which can lead to shorter-term market volatility in affected nations. Longer-term, however, growth possibilities in such emerging market locations continue to look more compelling than in developed markets, with stronger demographics, consumer demand and integration of companies onto the global stage, but such uncertainty serves to contain investor enthusiasm (and keeps valuations contained as well, which is not a terrible situation for value-seeking investors).

U.S. bonds gained reasonable ground, with flows moving away from equities. Investment-grade credit outperformed governments slightly, while high yield also returned positively to a lesser degree. Developed market foreign treasuries gained sharply with a cheaper dollar, while emerging market bonds were generally flat despite spread widening in Brazil, which affected index results.

Real estate experienced gains during the week, contrary to broader equity markets. Residential REITs outperformed mortgages, while U.S. outperformed international sharply, perhaps due to the tailwind of again lower interest rates.

Commodities gained on the back of energy. Crude oil rose +6% from just under $48 to $50.70/barrel upon anticipation of OPEC extending supply cuts during their meeting next week. Then again, we've come to expect week-to-week volatility as contracts have been vacillating between the range of $45-55. Industrial metals and precious metals also gained, the latter due to flows away from equities toward safe haven assets.

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 May 15, 2017.

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