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Weekly Review - September 25, 2017

Weekly Review - September 25, 2017

Guest Post - Monday, September 25, 2017

Summary

Economic data for the week was highlighted by the outcome of the Fed meeting, which outlined a gradual balance sheet reduction plan. Housing data was mixed, with prices increasing but sales were negatively affected by recent hurricanes. The latter also impacted near-term jobless claims.

Stock markets rose worldwide, with developed markets outperforming emerging markets, in contrast to recent trend. Bonds returns were generally weak globally, with interest rates ticking higher and the headwind of a stronger U.S. dollar. Commodity indexes gained as oil prices again rose above $50.

Economic Notes

(0) As discussed mid-week, the FOMC meeting and subsequent press conference ended with the balance sheet normalization program and hints that December is ‘in play' for a fed funds rate increase. The latter continues to be debated by markets, but probabilities have now risen for a +0.25% hike by year-end. Additionally, the Fed has assumed three rate increases in 2018 via their dot plot release, although markets remain skeptical, with probabilities of showing nothing beyond a December increase well into next summer. The key trend in both the Fed evaluation and that of outside economists is a downgrade for both economic growth prospects and inflation over the last several, as well as next few years, which has kept the expectations for interest rates lower than was first expected. Fed officials, though, remain hopeful that the next several years will bring more of the same—moderate economic growth, inflation near their target and continued low unemployment—noting that poorer growth or recessions are rarely forecast in print.

(+) The Philadelphia Fed manufacturing index rose by +4.9 points to +23.8 in September, contrary to an expected drop to +17.1. Key sub-components new orders and shipments both rose sharply, as did prices paid, while employment declined, as it has for several months in a row. The ‘special questions' posed in the survey also alluded to stronger sentiment around production growth over coming quarters. Overall, the report demonstrates solid manufacturing growth.

(0) Import prices for August rose +0.6%, slightly beating forecasts calling for +0.4%. On a core basis, excluding fuels, prices rose a more tempered +0.3%, taking into account a +5% price increase for imported petroleum. Outside of that component, industrial supplies, food/beverage and auto prices all rose a few tenths of a percent, in keeping with the broader number.

(-) The FHFA house price index rose +0.2% in July, which was a bit below the +0.4% increase expected. Home prices rose in two-thirds of the national regions, with the Great Lakes region, New York tri-state area and KY through AL region experiencing the biggest gains for the month. Year-over-year, the index has gained +6.3%, which is considered quite healthy from a historical standpoint.

(-) Existing home sales fell -1.7% in August to 5.35 mil. units on a seasonally-adjusted annualized scale, contrary to expectations of a small gain of +0.2%. Condo/co-op sales rose +2% for the period, while single-family moved in the opposite direction, down -2%. Regionally, the South and West experienced declines upwards of -5% each, while the Northeast gained over +10%. There did appear to be significant effects here from weather, as the Houston area alone experienced a drop of -25% year-over-year in the single-family area. Nationally, on a non-adjusted basis, existing homes were down -0.7% from a year ago, which is somewhat discouraging, despite a bump higher earlier in the year.

(0) Housing starts for August fell -0.8% to 1,180k, which was a disappointment relative to the +1.7% gain expected. For the month, single-family starts rose almost +2%, while multi-family fell -7% (however, a drop in July starts on the multi-family side was revised higher to help temper the effect). Regionally, the South and Northeast declined in the range of -8% (some of which is likely to have been related to hurricane effects for the latter), while the Midwest gained over +20% for the month. Building permits, on the other hand, rose +5.7% for the month to 1,300k, which was a better result than the -0.8% decline expected. The usually-sporadic multi-family group rose +20% to lead the charge, while single-family permits fell -1.5% for August. Regionally, all areas but the Northeast experienced gains.

(-) The NAHB homebuilder index for September fell -3 points to 64, contrary to expectations for little change. All key components contributed to the drop, including future sales expectations, current sales and prospective buyer traffic. Regionally, the Midwest and South experienced the greatest declines (at least in part due to hurricane activity for the latter, most likely), while the West and Northeast experienced improvements for the month.

(+) The Conference Board's Index of Leading Economic Indicators rose +0.4% in August, which was a pickup of +0.1% from last month's gain. While hurricane effects were not included, contributions from building permits, (positive) yield spread and consumer expectations led the way, and offset the negative of larger jobless claims. The coincident indicator was unchanged for the month, while the lagging indicator rose +0.3%. Over the prior six months, the LEI rose at an annualized +4.7% pace, which was a half-percent pickup over the prior six months. This is demonstrated in the chart below, which continues to indicate solid economic growth—with the index level now surpassing the most recent peak in 2006.

August 2017 Leading Economic Indicators

(+) Initial jobless claims for the Sep. 16 ending week fell -23k to 259k, which was far below the expected 302k. As anticipated, the change reflected a -30k drop in claims from Texas, which were hurricane-related and represented a move back towards normal, while new claims from Florida were smaller than anticipated. Continuing claims for the Sep. 9 week, on the other hand, rose +44k to 1,980k, which was just a bit higher than the consensus estimate of 1,975k, and also reflect carryover activity from the recent hurricanes.

Market Notes

Period ending 9/22/2017

1 Week (%)

YTD (%)

DJIA

0.36

15.17

S&P 500

0.09

13.43

Russell 2000

1.35

7.89

MSCI-EAFE

0.70

19.99

MSCI-EM

0.01

27.83

BlmbgBarcl U.S. Aggregate

-0.15

3.24


U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.

12/31/2016

0.51

1.20

1.93

2.45

3.06

9/15/2017

1.05

1.39

1.81

2.20

2.77

9/22/2017

1.03

1.46

1.88

2.26

2.80

U.S. large-cap stocks gained a minor amount, with new record highs being set for the Dow, S&P and NASDAQ, but were outshined by strength in small-caps last week. Aside from economic releases and the Fed meeting conclusion (which was no surprise to markets), a war of words with North Korea and hopes for tax reform remain as key factors underlying recent sentiment. From a sector standpoint, telecom, financials and energy fared best with returns in the +2% range, on the back of clarified Fed policy and oil prices rebounding, while defensive stocks across the board lost several percent, including the utilities and consumer staples groups. Healthcare stocks experienced some volatility earlier in the week as Obamacare repeal/replace legislation was brought up again before fading by the end of the week.

Foreign developed market stocks fared better than large-cap U.S. equities, but gains were tempered by the strength of the U.S. dollar, which gained almost a half-percent on the week. Several manufacturing indexes in Europe pointed to improvement, while inflation rose a bit—an area being closely watched by the ECB as of late, as domestic inflation is by the Fed. German elections were also on the forefront of investors, with Merkel appearing to be the frontrunner through the end the of the week. (Monday morning's results show her victory to be assured; however, her party did not fare as well as voters leaned to the right, which could create more government policy uncertainty than initially hoped.)

The Bank of Japan again voted for no change in their monetary policy, keeping short term rates slightly negative and 10-year bond rates targeted at 0%. However, additional stimulus measures were announced—in keeping with a string of such activities over the last decade. In this case, more nuanced objectives such as help for education and child care were targeted, with the latter being an indirect strategy to help the increasing integration of women into the workforce to help combat challenging demographics. The Japanese economy continues move at a slow pace, although there have been signs of some expansion and improvement on the corporate governance side on an anecdotal level. However, slow growth from a variety of macro factors continue to weigh on markets there, which are reflected in some valuation metrics.

U.S. bonds lost ground as yields rose across the curve, with credit holding up a bit better than governments, and high yield actually experiencing positive returns on the week. Foreign bonds were negatively impacted by the stronger dollar, which affected emerging markets a bit more than developed.

Real estate also lost ground as the result of higher interest rates, although losses abroad in Asia and Europe were to a lesser degree despite the stronger dollar. Healthcare was hardest hit, which coincided with political discussions surrounding the Obamacare repeal effort.

Commodities gained, bucking the usual headwind of a stronger dollar. The largest sector, energy, was responsible for the bulk of the gains as crude oil moved up to $50.66, ending the week just above the technically-significant $50/barrel threshold—this appeared to be due to demand picking up again following the hurricane-induced trough. Industrial metals also gained, while precious metals and soft commodities fell by several percent.

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 18, 2017.

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