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Weekly Review - May 31, 2016

Weekly Review - May 31, 2016

Guest Post - Tuesday, May 31, 2016

Summary

  • Economic data for the week was dominated by strong U.S. housing numbers, while durable goods and sentiment lagged. Comments from FOMC members alluded to a stronger chance of an interest rate hike in coming months.
  • Equity markets around the world gained on the week, with continued strength in oil prices and an improvement in economic and geopolitical sentiment somewhat. With interest rates flattish, bond prices didn't experience much movement during the week.

Economic Notes

(0) On a headline, level durable goods orders for April rose by +3.4%, which sharply outperformed the +0.5% increase expected. On the other hand, core orders, removing the most volatile components, fell -0.8%, compared to an expected +0.3% increase. The differential was due to an especially strong month from civilian aircraft orders, which rose +65% (orders for large, expensive items like these tend to result in a lumpy series month-to-month). Core shipments rose +0.3% for April, but the prior month's shipment data was revised downward by the same amount, creating a wash. The overall result is that capital goods demand for the month remained a bit weak. Goods orders have been soft for several quarters, reflecting softness in business capex spending—both within and outside the energy sector. In fact, from its peak, investment in oil drilling-related structures and mining equipment have declined by -70% and -56%, respectively. This has certainly been a factor, but non-energy capital spending has shown some weakness as well.

(0) The April advance trade balance report came in at -$57.5 bil., which was a slight widening over the prior month but still narrower than the -$60.0 bil. expected. Both nominal exports and imports increased, by +2.4% and +1.9% respectively, following declines the prior month.

(+) New home sales for April rose +16.6% to 619k on a seasonally-adjusted annualized basis, better than the -1.5% decline expected; in addition to revisions adding +44k to several prior months. Regionally, strength was seen in the South and West mainly, while the Midwest lost some ground during the month. Overall, this represented the strongest monthly sales number since Jan. 2008, and brought the year-over-year gain to +24%. The median new home price rose to $321,100, which is a record high. While the monthly numbers can be a bit choppy, spring is a key housing selling season, so positive surprises this time of year are especially taken more happily than negative ones. Pricing is an area analysts have been watching, with home prices surpassing those seen during the previous early-2007 peak in many areas.

(+) Pending home sales rose +5.1% in April, which outperformed the forecasted rise of +0.7%. The monthly increase was the largest since the Fall of 2010, with the overall level reaching its highest point since early 2006—this bodes well for existing home sales figures for the coming few months. Regionally, the West and South experienced the sharpest gains, while those in the Midwest fell slightly. Year-over-year, the index shows a +3% gain.

(-) The final May Univ. of Michigan consumer sentiment report was revised lower by -1.1 points to 94.7, which underwhelmed compared to an expected 95.5 reading; however, the index remains +5 points higher than April. Consumer expectations for the future fell by nearly -3 points, while the assessment of current conditions rose by just over a point. Long-term (5-10 year) inflation expectations fell by a tenth of a percent to 2.5%, which is actually an all-time low for the measure.

(0) The 2nd estimate of 1st quarter GDP was revised upward a bit from +0.5% to +0.8%, which a tenth of a percent lower than expected. The bulk of the change came from higher accumulation of inventories and a slightly tighter trade deficit compared to the initial release last month. Consumer spending was unchanged at +1.9%, although there were expectations that this would be revised up a bit. Interestingly, estimates for the 2nd quarter remain very mixed, with estimates of about +1% on the low end and +3% on the higher end. Much of this is based on hopes for continued improvement in housing as well as business spending (both of which have been stubbornly hesitant to experience growth during the recovery).

(+) Initial jobless claims for the May 21 week fell to 268k, which was -7k below expectations. Continuing claims for the May 14 week came in at 2,163k, which were -9k below expectations. Despite some weekly volatility due to some auto plant re-tooling shutdowns and other seasonal effects, claims levels remain quite low.


Read the "Question of the Week" for May 31, 2016:

What's the probability of the Fed taking action this summer?


Market Notes

Period ending 5/27/2016

1 Week (%)

YTD (%)

DJIA

2.15

3.81

S&P 500

2.32

3.67

Russell 2000

3.47

1.89

MSCI-EAFE

2.21

-1.06

MSCI-EM

2.93

1.78

BarCap U.S. Aggregate

0.15

3.40

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2015

0.16

1.06

1.76

2.27

3.01

5/20/2016

0.33

0.89

1.38

1.85

2.63

5/27/2016

0.32

0.90

1.39

1.85

2.65

Stocks experienced a positive week across the board—the best week for the S&P in three months—with oil prices rising higher, better economic news from housing and some Brexit fears abating. Additionally, the Philadelphia Fed president added more optimistic rhetoric about multiple rate hikes occurring this year, coupled with Janet Yellen's speech on Friday. On a sector basis, every group was in the positive, led by technology and financials (the latter due to hopes that a rate hike would bring a stronger operating environment), while utilities and energy experienced the lightest gains.

Interestingly, individual investors, as measured by the AAII survey, are the most pessimistic they've been in some time. Only 18% of respondents considered themselves 'bullish', which is the lowest level in 11 years (since 1987, just under 40% of respondents are in this category on the average given week). However, more are in the 'neutral' camp (over 50%, which is 20 percentage points higher than normal) than are 'bearish' (about 30%, or within a few ticks of the long-term average). The ICE sentiment index, which measures the number of puts purchased vs. calls, recorded similar pessimism. No doubt, confusion about Fed policy, lack of earnings visibility and the election season have been on investor minds.

Foreign stocks in developed markets were mixed, with Europe and the U.K. outperforming, led by better-than-expected company earnings results (albeit with low expectations). Japan earned smaller gains, continuing their woes year-to-date, due to growth concerns, including the PMI contracting and weak trade results. It's also assumed that a planned sales tax increase might be delayed again for some time (perhaps years) due these weak conditions, as the last increase by a few percent in 2014 created negative economic results. Emerging markets were mixed, with several nations ending up as the week's strongest performers, led by India, Turkey and China (non-local shares), while Brazil came in worst in the pack. For the latter, the market run this year based on hopes for governmental change (which has begun to occur) might be another example of 'buy the rumor, sell the news' effect.

With interest rates little changed on the week, U.S. bonds barely budged, with government and investment-grade corporate debt performing in line. High yield came in a bit stronger, with continued strength in the oil patch. Despite a slightly stronger dollar, foreign bonds in both developed and emerging markets came in similarly to domestic debt. Year-to-date, returns for bond indexes continue to compete neck-and-neck with equities, led by high single-digit gains from long-term (20-year+) treasuries—although high yield and emerging market bonds have been nearly as strong. In the one significant piece of foreign news, Greece will €10.3 bil. in aid through new loans, after the IMF withdrew their opposition to the bailout as the nation tacked on further austerity measures.

Real estate gained generally, with the best results in Europe, followed by U.S. names, although returns didn't keep up with the broader equity market. Broader Asia gained slightly on net, although Japan and Australia lost ground for the week. Domestically, the more cyclical lodging/resorts sector experienced the best week, while the others were largely undifferentiated, except for mortgage REITs, which lost ground due to more rate hike concerns (unlike equity REITs, which own properties, these provide property financing, so are more interest rate sensitive). Year-to-date, the strongest commercial real estate gains have come from Australia and Canada, which being major commodity producers, have benefitted from a sentiment turnaround in that asset class, although there are concerns about real estate in those regions for a number of reasons—partially due to the commodity correlation, but also the market concentration in development-regulated urban areas.

Commodities continue to move higher, this time led by agriculture, which outpaced energy's gain of +2%. Corn, cotton and sugar all gained a few percent, with strong export demand and some weather uncertainty. Precious metals lost ground by several percent, as the probability of higher rates loomed, creating tougher competition for low-risk assets. Prices for West Texas intermediate crude touched $50 for the first time since October of last year as the American Petroleum Institute and U.S. Energy Information Administration reported significant drops in crude inventories. Coupled with outages in Canada and Nigeria have led to further narrowing in supply-demand imbalances that started with lower rig counts and now include a few geopolitical catalysts. For oil, or any chart for that matter, round numbers like $50 can be technically significant.

Have a good 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 May 23, 2016.

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