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Weekly Review - October 30, 2017

Weekly Review - October 30, 2017

Guest Post - Monday, October 30, 2017


Economic data for the week was highlighted by a strong 3rd quarter GDP report, in addition to solid durable goods results. Housing experienced a bit of a bounce back from a weaker hurricane-plagued prior month, while jobless claims contained to run at a low level.

U.S. stocks ended the week again with gains, led by strong earnings and economic data; foreign developed markets gained in local terms, but lagged when a stronger U.S. dollar was accounted for. Bonds lagged somewhat upon rates ticking higher. Commodities gained on net as crude oil prices continued a trend higher, as production cuts looked to continue.

Economic Notes

(+) The advance release of 3rd quarter GDP came in at +3.0%, sharply beating expectations calling for a more tempered +2.6%—expected to be held back by a larger degree by the impact of the hurricanes on the Gulf Coast. During the quarter, inventories and trade were additive to growth, as was domestic final sales. Business fixed investment also gained +4%, with strength in equipment and intellectual property, while investment in structures declined. From an inflation standpoint, core PCE rose at a rate of +1.3%, which was in line with expectations but lower than other measures, while the GDP price index rose at a stronger +2.2% rate. While still subject to revision, this was a far better-than expected result, although the stronger inventory build could serve to lower results for the current Q4—for which estimates appear to be in a similar +3% range.

Debate continues regarding the measurement of technology's impact on GDP. But, this is not a new problem, and in fact, has been the case as long as economic growth has been measured, as well as trying to measure it in hindsight over the centuries as some economists have attempted, and a few recent Federal Reserve research papers have considered the topic. Measuring economic growth on a nominal level is relatively straightforward, but separating out the 'real' component, and the inflation rate that allows for this separation, prove far more difficult when considering quality improvements and substitutions of goods that occur over time.

(+) Durable goods orders for September rose a solid +2.2% for the month, beating the +1.0% increase expected. Much of this was due to an over-30% gain in non-defense orders of commercial aircraft, which can be notoriously choppy month-to-month. On the core durable goods side, the gain was a more tempered +1.3%, but still outperformed expectations by a percent. Core capital goods shipments also fared well, rising +0.7% for the month, relative to an expected +0.1% rise.

(+) The FHFA house price index for August rose +0.7% beating consensus expectations calling for +0.4%. Prices increased in all but one region, led by the Pacific and Texas/southern plains segment, while New England declined slightly. Year-over-year, the broader U.S. index is up +6.6%, which remains strong relative to history, especially on an after-inflation basis.

(+) New home sales for September rebounded sharply higher by +18.9% to a seasonally-adjusted annualized rate of 667k, relative to expectations calling for a -1% decline. This was coupled with slight revisions higher for prior months. The South contributed three-quarters of the gain, as expected, as hurricane effects reversed, while the other three regions also gained to lesser degrees. The inventory measure fell by -1 month to 5.0 months supply.

(-) Pending home sales for September were flat, which disappointed relative to forecasts calling for a +0.5% gain. The Southern region represented the primary detractor for the past two months, as hurricanes obviously put a damper on home searches and purchases. Elsewhere, in the other three regions, pending sales gained over a percent, although limited inventory continues to be noted as a headwind to even higher sales activity.

(0) The advance edition of the goods trade balance for October came in -$0.8 bil. lower at -$64.1 bil., compared to a forecast level of -$64.0 bil. expected. Exports rose by just over a half-percent due to industrial supplies/petroleum and 'other goods', which each gained +5%, while autos fell by -5%. Imports rose +1%, with a similar pattern of industrial supplies/petroleum and capital goods gaining over +2%, while imports of autos fell by -2%.

(-) The final edition of the Univ. of Michigan index of consumer sentiment for October ticked down by -0.4 of a point to 100.7, just below consensus expectations of 100.8. Assessments of current conditions ticked up just slightly, while expectations for the future moved down by almost a point. Inflation expectations for the coming year ticked up a tenth to 2.4%, as did those for the coming 5-10 years to 2.5%.

(0) Initial jobless claims for the Oct. 21 ending week rose by +10k to 233k, but still landed a shade below expectations of 235k. Most hurricane-affected areas have stabilized, with the exception of Puerto Rico, which experienced gains. Continuing claims for the Oct. 14 week fell -3k to 1,893k, just a touch above forecasts calling for 1,890k. Aside from the normalizations following hurricane activity, claims levels continue to hover near all-time lows, which is a positive for labor markets.

Market Notes

Period ending 10/27/2017

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U.S. stocks gained on the week on the back of a strong Friday, with tech giants Amazon, Alphabet and Microsoft all experiencing solid gains based on earnings, and improved sentiment due to stronger-than-expected 3rd quarter GDP. This positivity led the S&P 500 to another all-time high. From a sector standpoint, technology and consumer discretionary led the way with solid gains, while health care and consumer staples lagged with losses over a percent on the week. Health care stocks were negatively affected somewhat by the President's new crackdown on opiates and Amazon's filing for drug distribution licenses in several states.

Foreign stocks outperformed U.S. equities in local terms, particularly due to strong results in Japan in the aftermath of election results and consistency in policy aimed toward multi-pronged economic growth. While a far stronger U.S. dollar turned these gains into losses on net for the EAFE, Japanese stocks retained their positive results. The ECB announced that it will 'taper', cutting its bond-buying program from €60 bil. to €30 bil. next year, which was not a surprise—the message from the central bank has been that while purchases would be done at a lower rate, they could last for a longer period of time, which was taken as a positive. The 'forward guidance' language in that respect is similar to that used by the U.S. Fed in prior years. The German business climate survey recently marked a 48-year high, which has been indicative of stronger conditions in Europe that have prompted the policy adjustment. The Catalonian independence movement in Spain came to a head again, as the regional government's vote to secede was countered by Spanish legislators—this affected Spanish stocks negatively (as Catalonia represents about a fifth of the nation's economy) as well as the euro overall—but has not appeared to create additional volatility for other economies in the Eurozone at large.

U.S. bonds were mixed but generally slightly slower as interest rates ticked higher on the longer end of the treasury yield curve, in keeping with stronger economic results, which raises the probability of Fed action at a faster rate. Overseas, foreign developed market bonds gained slightly, but the impact of a far stronger dollar resulted in a loss of about a percent. Results in emerging markets were a bit worse, with a slight loss in local terms turning into a major loss in USD terms.

Real estate securities generally lost ground in the U.S. and overseas, with Asia faring slightly better and Europe slightly worse. Regional malls and retail were hit especially hard again with major losses as investors questioned the continued viability of brick-and-mortar properties in the wake of internet commerce encroaching in an increasing number of areas.

Commodity indexes gained several percent despite the strength in the dollar. Energy again led the way, with crude oil rising in price by +4% to $53.90/barrel for West Texas intermediate, and Brent crude moving above $60, on speculation that OPEC will extend their production cuts through the end of next year. Natural gas, on the other hand, fell -5% on expectations for a warmer winter across the bulk of the U.S.—which drives down gas demand. Metals pared back somewhat, as recent positive momentum slowed.

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 23, 2017.

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