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Weekly Review - October 26, 2015

Weekly Review - October 26, 2015

Guest Post - Monday, October 26, 2015

Summary

  • Economic data on the week was focused on several housing reports, which came in better than expected; however, the much broader index of leading economic indicators fell backward a bit.
  • Global equity markets responded positively to news of possible (European Central Bank) and actual (China) additional quantitative easing measures designed to spur sluggish economic growth. U.S. bonds lagged upon slightly higher interest rates, while foreign results were mixed due to a stronger dollar. Crude oil declined dramatically again upon reports of higher inventories and higher-than-expected upcoming supply.

Economic Notes

(0) The FHFA home price index for August rose +0.3%, which lagged expectations calling for a +0.5% gain. Of the nine key regions, the majority experienced gains, with Ky.-through-Ala., upper Midwest and Atlantic-south-of-D.C. regions rising nearly a percent, while the Great Lakes and Mid-Atlantic lost some ground. Year-over-year, the index is +5.5% higher, similar to other housing price indexes and showing strength compared to long-term averages.

(+) Housing starts for September rose +6.5%, far surpassing the +1.4% gain expected. Multi-family structures rose over +18%, which tends to be a more volatile part of the series, explained much of the move, as single-family starts were only up a few tenths of a percent. Building permits, by contrast, fell -5.0%, relative to an expected no change, with multi-family representing the bulk of the move (down -12% on the month). It’s tough to determine some months due to the inherent volatility of some of these components, mainly in multi-family building and permitting, but conditions do seem to be improving here.

(+) The NAHB index of homebuilder sentiment rose to 64, beating expectations of 62 and achieving a new high for the recovery—in fact, the highest level in a decade. Of the three elements of the survey, current and expected single-family sales increased by several points, while prospective buyer traffic was flat. This measure has tended to correlate well to upcoming actual construction activity looking forward, so a positive report in that regard.

(+) Existing home sales for September rose +4.7% to 5.55 mil. seasonally-adjusted annualized, which bested expectations calling for a +1.5% gain and undoing the decline from August. Single-family structure sales represented the difference, rising over +5%, as co-ops/condos were flat. The median price of existing sales is up +6.6% from 12 months ago, average number of days on the market has dropped from 56 to 49, as activity here has expanded closer to normal levels (pre-bubble, that is). Distressed sales have fallen another few percent from 10% a year ago to 7%, while all-cash and investor buyers are a bit lower than at this time last year, but the pace of decline has slowed. Those metrics generally point to larger owner-occupiers as opposed to speculators, which is the sign of a fundamentally stronger long-term housing market.

(-) The Conference Board index of leading economic indicators for September posted a slight decline of -0.2%, as weakness in stocks, manufacturing and housing permits were tempered by positive impacts from interest rate spread, jobless claims, credit and new manufacturing/consumer orders. By contrast, the coincident and lagging indicators rose by +0.2% and +0.5%, respectively. There aren’t a lot of surprises in the LEI, as the underlying economic stats are already ‘out there’, but it does provide a nice snapshot from a 30,000-foot level, and tends to be useful in historical correlations to business cycle activity. Sometimes simpler is better. All-in-all, though, the trend from the 2009 trough remains positive as easily seen in the following chart.

(+) Initial jobless claims for the Oct. 17 ending week rose to 259k, which was less than the expected 265k, and brought the four-week moving average for claims to a new low for the current recovery cycle. Continuing claims for the Oct. 10 week were largely flat at 2,170k, just below the 2,186k expected. No unusual conditions were reported by the government, and claims activity (signifying layoffs, for a large part) remain quite low.

Market Notes

Period ending 10/23/2015

1 Week (%)

YTD (%)

DJIA

2.56

0.95

S&P 500

2.09

2.47

Russell 2000

0.33

-2.20

MSCI-EAFE

0.83

2.44

MSCI-EM

0.38

-9.18

BarCap U.S. Aggregate

-0.09

1.47

U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2014

0.04

0.67

1.65

2.17

2.75

10/16/2015

0.01

0.61

1.36

2.04

2.87

10/23/2015

0.01

0.66

1.43

2.09

2.90

U.S. stocks gained on a handful of positive global macro developments. Around the world, perhaps the biggest news of the week was the European Central Bank’s comments alluding to a possible extension of their quantitative easing program in December due to persistent headwinds in ‘creating inflation’. China followed later in the week with their 6th rate cut in the past year, dropping 1-year benchmark lending and deposit rates by 0.25% and reserve requirement by 0.50%. Both stimulative events naturally spurred investor hopes for lower rates for longer and an improvement for global economic growth, which has been lackluster to say the least.

Later in the week, technology giants Amazon, Alphabet (formerly Google) and Microsoft all beat expectations, causing the sector to outperform all others, gaining over +4% on the week, with industrials a close second. Energy, health care (partially due to Valeant Pharmaceuticals, which is widely held by hedge funds) and utilities all lagged with negative performance. Quarterly results have continued to be mixed, with a third of companies in the S&P having now reported. Earnings figures have been a bit better than expected, while, on par with recent trends over the past year or two, revenues have come in weaker than anticipated (strong dollar not helping matters). Consumer firms have generally fared decently, while the energy/materials complex continues to struggle.

Foreign stocks were hampered by a U.S. dollar that gained by +2.5% on the week, largely due to weakness in the Euro in relative terms, but in other currency pairs as well. The logic is that adding stimulus adds to a region’s debt load and pressures interest rates lower, which is a depressing element on a currency. Of course, if the stimulus works, and economic growth does improve, a currency’s relative value should improve due to better underlying strength and interest rate pressures upward. Currency analysis in the short-term can be a fickle enterprise.

No widespread trends were in effect during the week. Specifically, both Europe and Japan showed strength in local terms, but this was tempered by the dollar’s impact. Commodity-related nations, including Norway, Canada and Brazil continued to experience performance difficulties.

Chinese GDP for the 3rd quarter surprised by coming in at 6.9%, a tenth better than expected, although the slowest pace since 2009. Interestingly, it looked as if domestic consumption was a greater contributor than exports, which is the first time that services/consumption has accounted for over half of China’s GDP (compared to just over 40% a decade ago). This has been looked at as being significant in terms of a long-term shift to a more sustainable ‘next-phase’ growth model. There are other signs of life, including bank loan growth and in various consumer categories, such as foreign travel, Apple products, SUV sales and movie box office revenue. As seen in the interesting graphic below, the ‘complexity’ of China’s economy has been steadily increasing over the years, which is not necessarily a widely-known trend.

(Source: Matthews Asia, CEIC. ‘Primary’ industry refers to agriculture, forestry, animal husbandry and fishery and related services. ‘Secondary’ industry refers to mining and quarrying, manufacturing, production and supply of electricity, water and gas, and construction. ‘Tertiary’ industry refers to all other economic activities, including real estate, finance, wholesale and retail, transportation and other service industries.)

U.S. bond indexes lost some ground on the week as interest rates ticked upward, with longer duration issues being more affected than shorter. In a week where risk assets performed better than ‘risk-off’, high yield corporates ended up as one of the week’s better performers, despite additional pricing pressures (again) in the energy sector.

The treasury has decided to cancel an auction for 2-year notes on Oct. 27 due to uncertainty surrounding the Federal debt limit and operational settlement concerns. However, other maturities don’t appear to be affected and it’s not clear whether any additional postponements or delays will be put in place. This isn’t entirely unusual, as similar delays have occurred due to debt limit constraints before—typically affecting short-maturity bill auctions. Usually, auctions have been rescheduled to resume within a week or so of the original date, assuming the debt ceiling issues are ironed out.

Outside of the U.S., European debt fared with, especially in the periphery areas like Spain and Italy, that are expected to benefit most from stimulus and feature the largest spreads; however, higher-quality debt performed positively as well. In translation terms, the weakness in the USD was significant as well for a one-week basis, and explained as much as anything else (where absolute returns in fixed income are generally minor week-to-week relative to other asset classes).

Real estate experienced a strong week, in keeping with or slightly better than equities. European REITs also showed strength, with the ECB quant easing expectations. U.S. lodging/hotels continued to show some weakness, however, along the lines of continued slow economic growth domestically.

Commodities experienced a weak showing, losing several percent on the week. Crude oil prices fell over -6% to under $45 once again, as reports showed inventory levels rose dramatically higher than expected and Iran’s oil minister predicted a boost of 500k barrels/day in coming months. Supply concerns continue to be the issue. Agriculture and precious metals experienced the smallest losses.

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 October 19th, 2015.

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