Summary
Economic data last week showed continued signs of expansion, seen by a continued upward trend in an index of broad leading economic indicators, as well as stronger manufacturing and job markets; however, housing data continued mixed.
U.S. equity markets rose to hit new highs, but were surpassed by foreign stocks, helped by a weaker dollar. Domestic bonds lost ground with higher interest rates, while emerging market debt fared better. Commodities gained with currency impacts and higher oil and metals prices.
Economic Notes
(-) The New York Fed Empire state manufacturing survey for September fell by -6.6 points to +19.0, falling below the +23.0 reading expected. Under the hood, components were mixed, with shipments falling sharply, new orders and expected business conditions in six months dropping slightly, while employment and prices paid both increased. Overall, however, conditions remained positive, with any reading over zero registering expansion.
(+) The Philly Fed manufacturing survey for Sept. snapped back from a weaker reading the prior month, by rising by +11.0 points to +22.9—stronger than the expected +18.0. The key components of new orders, shipments and employment all gained to remain in strongly expansionary territory. Falling were the segments of prices paid and six-month-ahead business prices received, although these still continued to expand.
(-) Existing home sales for August came in unchanged at a rate of 5.34 mil. seasonally-adjusted annualized units, underperforming expectations of a +0.5% increase for the month. Both single-family homes and condos/co-ops experienced a similar lack of change for the month. Regionally, the Northeast fared best with +8% gains, while sales in the West fell by -6%. This figure represents a decline of -1.5% from a year ago, which is indicative of the lack of activity likely driven by continued tight inventories. The average listing period came in at 29 days, a day shorter than last month, but quite short on a historical basis. New listings are up +11% year-over-year, however, with total single-family homes on the market having risen on a year-over-year basis for the first time in several years. The median sales price also rose +4.6% year-over-year—in keeping with other national housing price indexes.
(+) Housing starts for August rose +9.2% to a seasonally-adjusted annualized rate of 1.282 mil. units, surpassing the median forecast calling for a +5.7% increase and included a half-percent revision higher for the prior month. However, under the hood, the volatile multi-family group led the way, with a substantial month-over-month gain of +29%, while single family starts rose +2%. With the exception of the Northeast, which was flat, starts rose in all regions, but was led by the West, up +19%, and Midwest, up +9%. Building permits, on the other hand, fell by -5.7%, rather than experiencing a +0.5% gain as expected by consensus. By segment, single-family fell -6%, while multi-family declined -5%; regionally, the Northeast and West experienced the most substantial drops. The month-to-month data is always choppy in this series, but the overall trend since lows in 2009 (when starts were around 500 thousand), with the last 12-month period seeing a +9% increase in starts.
(0) The NAHB homebuilding index for September was unchanged at 67, beating an expected decrease by a point. Current sales rose a point, surpassed by future sales expectations rising two points, while prospective buyer traffic came in flat. Regionally, the Northeast region experienced the sharpest gains (rising by 15 points), while other segments were flat or lower. Traditionally, this sentiment metric provides some insight into coming months’ housing starts, which continue to look relatively mixed with a steady, but not explosive, growth trajectory.
(+) The Conference Board Index of Leading Economic Indicators for August rose by +0.4%, continuing a string of several months of positive growth. Changes were led by positive contributions in new orders and the financial components of the index (interest rate spread and stock prices), while building permits and manufacturing hours represented the weaker elements. In fact, the Board used the description of ‘it doesn’t get much better than this,’ although noting the trend in expansion has moderated since the beginning of the year. For the past six months, the index rose at an annualized rate of +5.0%, which is slower than the +7.8% rate from the prior six months.
The coincident index and lagging index each rose +0.2% for the month as well—both similar to the pace of the last several months. The annualized rate for the last six months for the coincident was +2.3%, just a bit slower than the prior period, while the lagging indicator rose at an also-reduced +2.0% rate. Seen in obvious terms in the chart below, and in the above quote, economic conditions continue to run on all cylinders.
(+) Initial jobless claims for the Sep. 15 ending week fell by -3k to 201k, far lower than the expected jump to 210k. Continuing claims for the Sep. 8 week fell by an even more dramatic -55k to 1,645k, below the 1,705k expected. No anomalies were reported, with overall reports continuing to run at extremely low levels that implies a strong labor market and few layoffs.
Market Notes
| Period ending 9/21/2018 | 1 Week (%) | YTD (%) |
| DJIA | 2.25 | 10.01 |
| S&P 500 | 0.86 | 11.13 |
| Russell 2000 | -0.53 | 12.48 |
| MSCI-EAFE | 2.90 | -0.55 |
| MSCI-EM | 2.23 | -9.24 |
| BlmbgBarcl U.S. Aggregate | -0.26 | -1.76 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2017 | 1.39 | 1.89 | 2.20 | 2.40 | 2.74 |
| 9/14/2018 | 2.16 | 2.78 | 2.90 | 2.99 | 3.13 |
| 9/21/2018 | 2.18 | 2.81 | 2.95 | 3.07 | 3.20 |
U.S. stocks, as represented by the Dow and S&P, again reached new highs. By sector, materials, financials and energy gained by over 2%—the latter two positively impacted by higher interest rates and oil prices. Utilities lost the most ground, down over a percent, also due to rising rates, which tends to be the nemesis of more conservative, dividend-based characteristics of that sector. Real estate suffered the same fate of negative returns, albeit to a far lesser degree; however, foreign REITs benefitted from the weaker dollar effects.
It seemed the early week announcement of a 10% tariff on $200 bil. of Chinese goods didn’t rattle the market as was first feared, perhaps due to the tariff rate ending up below the initially advertised 25%. (Although the higher rate has still been declared to begin at year end, absent other action taken before then, although plans for hoped-for talks appeared to break down on Friday.) Excluded from the tariff group were several high-profile consumer product segments, including Apple’s Watch and AirPods, other smartwatches, as well as safety gear, such as bicycle helmets, baby car seats and bedding. Naturally, political impacts have played a strong role in the implementation of these policies, particularly in the weeks before mid-term elections. The Chinese responded with $60 bil. of their own tariffs on U.S. goods—mostly focused on agriculture.
Foreign stocks gained in both developed and emerging markets, with help from positive sentiment in the U.S., but surpassed domestic returns with help from a far weaker dollar. Japanese stocks fared especially well, with the re-election of Prime Minister Abe to a third term, providing policy consistency, and the Bank of Japan reaffirmed its current monetary easing stance due to low inflation. Despite the implementation of further tariffs, Chinese stocks rallied, with government promises to stimulate the economy—effects that could offset damage inflicted by U.S. tariffs on exports. Correlations of foreign equities to U.S. stocks have been notably strong as of late, with sentiment continuing to be driven by weekly expectations for trade policy.
U.S. bonds lost ground on the investment grade side as interest rates moved higher across the longer end of yield curve, with the 10-year treasury note reaching a four-month high and surpassing the 3% level again. The Fed is expected to raise rates again next week by a quarter-percent, which appeared to have helped move sentiment in a higher rate direction. Floating rate bank loans fared well, as expected, while high yield fell just behind, with slightly positive returns. Foreign bonds in developed markets performed largely similar to those in the U.S., while emerging market local currencies rallied by a few percent to buck their trend of negativity as of late—as the crises in Turkey and Argentina appear to remain self-contained that has given investors hope that the contagion has not spread to other emerging market nations.
Commodities rose on the week, along with a weaker dollar. Industrial metals and energy provided the strongest gains, while agriculture and precious metals contributed slightly. The industrial metals complex was led by heavy volume contributors copper and zinc, which each gained about +7% on news of tariff levels being set lower than feared. The price of crude oil rose nearly +3% to just under $71/barrel, as OPEC members Saudi Arabia and Russia agreed to keep production at its current level (rather than expanding it further via other ‘exemptions); as well as reports surfacing that Saudi Arabia may be holding tighter inventories than expected for the highest-volume varieties of oil.
Sources: Ryan M. Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. 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.