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Weekly Review - October 5, 2015

Weekly Review - October 5, 2015

Guest Post - Monday, October 05, 2015


  • Economic data last week was lackluster, but not too far from expectations, with ISM manufacturing staying in just in expansionary territory, while the employment situation report disappointed on the downside.
  • U.S. markets gained on the week, with sentiment improving on net despite continued global growth worries; emerging markets performed especially well. Interestingly, bond prices also experienced a positive week as interest rates fell.

Economic Notes

(-) The ISM manufacturing index for September declined by just under a point to 50.2, which disappointed slightly compared to the expected 50.6 reading. Production, new orders and employment all fell by 1-2 points. Export orders and prices paid both fell again as well, and remained under 50, which isn’t surprising considering the strong dollar trend. This reflected broad weakness for the month, but the headline and key components remained above 50, which is a positive sign of at least some growth.

(0) Personal income for August rose +0.3%, which was a tenth below expectations. Personal spending, however, was a tick higher than forecast for the month, at a +0.4% gain. The headline and core PCE price indexes were flat and showed a +0.1% gain, respectively, in keeping with continued tame inflationary pressures.

(-) The Case-Shiller home price index fell -0.2% in July, which ran contrary to expectations of a +0.1% gain, in addition to a slight downward revision for the prior month. Prices fell just over half of the 20 cities in the index; however, some seasonal adjustments are thought to be the culprit. Year-over-year, prices rose +5%, which remains solidly positive, especially on an after-inflation real basis. San Francisco and Denver have led the way over the past year, with price gains over +10%.

(-) Pending home sales for August fell -1.4%, which ran contrary to an expected +0.4% rise. The month was characterized by declines in 3 of the 4 key regions, with Northeast faring worst with a -6% decline while sales in the West rose +2%. Year-over-year, pending sales rose +6.7%.

(+) Construction spending for August rose +0.7%, which bested expectations of a +0.5% gain. Residential gained +1.3% and led the way, however some previous months were revised downward, tempering the positivity.

(-) Factory orders for August fell by -1.7%, which was a bit more than the expected -1.2%. Core durable goods, which represents non-defense ex-aircraft, were revised downward a bit more than previously, as were core shipments. Inventories also fell by a third of a percent. All of this is in line with broader manufacturing stats pointing to a ‘soft patch’.

(+) The Conference Board consumer confidence index for September rose +1.7 points to 103.0, which outperformed the consensus estimate of 96.8. Household assessments of current conditions rose several points, accounting for the broader survey improvement, while future expectations were little changed. The labor differential that counts jobs appearing plentiful versus harder to get also improved to a new high point in this cycle.

(+) The ADP employment index for September showed employment growing by +200k, which was higher than the expected +190k. Service jobs represented the bulk of the report, gaining +188k, with the other +12k coming from goods-producing areas (it’s not always obvious as to how big a distinction there is between the ‘old’ and ‘new’ economy, from a jobs creation standpoint). Within the goods-production component, manufacturing jobs actually fell by -15k, mining of about -8k (implying energy sector weakness), while construction rose by +35k.

(0) Initial jobless claims for the Sept. 25 week rose +10k to 277k, which were slightly more than the expected 271k. Continuing claims for the Sept. 18 fell a bit to 2,191k, which was below the expected 2,230k. No unique events were reported by the Dept. of Labor, and results fell within recent ranges.

(-) The big September employment report came in much weaker than expected, which was a negative for equity markets on Friday morning. Nonfarm payrolls grew at a +142k pace, which disappointed relative to an expected gain of +201k, and two prior months were revised downward by almost -60k. Private payrolls represented +118k of the gain, which is a large proportion but has increased at a slower rate than early- and mid-year—within the segment, manufacturing lost -9k jobs while mining/logging (including energy) fell by -12k.

The unemployment rate was flat as expected at 5.1%, although the U-6 underemployment count dropped -0.3% to an even 10.0%. Labor force participation fell by a few tenths to 62.4%, which explained a bit of that difference, lowering the quality of the headline number. Interestingly, it looks as if the labor force participation rate is slated to decline by another 2% or so over the next decade to due deteriorating/aging demographics, although some older workers staying in the pool for longer, if they are able, may offset a bit of this. These trends are difficult to forecast, but important to keep in mind. Average hourly earnings were flat on the month, in contrast to an expected small increase of a few tenths on the month, with the year-over-year gain coming at +2.2%. The average workweek was unchanged at 34.5 hours.

There has been a weakening of manufacturing data in recent months, and this employment report falls right along the same lines. While underlying metrics have improved dramatically, thoughts are now that the FOMC may use this soft patch of certain data to hold off on a December rate increase. The bears who figured January or later in 2016 all along may have their views validated yet, although underlying economic growth overall on a trend basis continues to look steady, albeit slower than many would like. Historically, this wouldn’t have warranted such an emergency low rate for so long, as we’ve mentioned many times before, but the policy shift itself and risk of removing any accommodative influences are keeping the Fed cautious.

Market Notes

Period ending 7/10/2015

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U.S. stocks weathered volatility again on the week before rising higher by Friday (bucking some lackluster economic and jobs news along the way). From a sector standpoint, materials and energy ran counter to recent trends by ending up as the best performers, while financials and telecom ended up in the negative. Large-caps significantly outperformed small-caps, which struggled due to exposure to higher-valuation firms that have sold off more recently. Coming weeks will offer earnings results for the 3rd quarter, for which expectations have already been toned down dramatically, so the usual game of release vs. low estimates will likely play out again. Interestingly, and not discussed in the media is the state of the S&P 500 by sector. If the horrific energy sector is removed, and for good measure, materials as well, expected earnings growth for the other 8 sectors isn’t looking as terrible for 2015 as a whole.

The Federal debt ceiling was originally thought to be sufficient until mid-Dec.; now, it’s looking more like early Nov., based on estimated tax receipts and other flows. Such a limit increase could be coupled with a highway bill extension or other legislation, but this remains to be determined, although it is widely conjectured that Speaker Boehner’s impending departure could actually smooth the process and lessen chances for a summer 2011-like disruptive debate. It is tiresome to rehash this debate as has been the case the last several years, but it could certainly add a degree of politically-driven volatility towards that time if partisan politics over seemingly small (in dollar, larger in ideology) issues hold up this process. Interestingly, the U.S. is the only remaining developed market nation to still have such a limit in place requiring periodic renewal.

Foreign stock returns, which were slightly negative in local terms, turned positive when translated back due to a weaker dollar. Japan outperformed Europe and the U.K. in developed markets, even as Japan moved back into deflationary territory (raising hopes for more stimulus), while emerging market stocks were the leaders on the week, led by Brazil, India (with a rate cut deeper than expected) and China (H- but not A-shares), as Chinese PMI came in slightly better than expectations at 49.8, just barely in contractionary territory (50 is neutral of course).

Bonds experienced a solid week as risk assets lost ground again, taking the bellwether 10-year treasury under 2% again. Long treasuries led the way, due to duration effect, while high yield bonds lost ground. Foreign debt of all types generally performed well due to the weaker dollar on the week.

Real estate in the U.S. gained sharply on the week, led by residential/apartments, which could be related to the mixed housing releases; international real estate also gained.

Commodities were generally lower on the week. Crude oil bounced around within a dollar or so of $45/barrel, before ending slightly north of that point—it’s been in a fairly tight range around that figure for the past month or so. Natural gas declined sharply, while industrial metals experienced gains offset by weaker pricing in precious metals.

A full quarterly asset allocation summary for Q3 is available from your relationship manager, which lays out much more detail in terms of economic key points as well as asset class-by-asset class views.

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 September 28, 2015.

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