Weekly Update 6/10/2019

Your Weekly Update for Monday, June 10, 2019

Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington.  We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to info@beaconrwa.com.

If you or someone you know is worried about retirement, send us and email or give us a call for a no-obligation Retirement and Social Security Analysis.

If you find this information useful, please forward this newsletter to a friend and ask them to subscribe at https://newsletters.beaconrwa.com/subscribe.

Have a great week!

Mike Elerath
National Social Security Advisor

Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
NMLS #107972

Mortgage Rates

Sam Khater, Freddie Mac’s chief economist, says, “While the drop in mortgage rates is a good opportunity for consumers to save on their mortgage payment, our research indicates that there can be a wide dispersion among mortgage rate offers. By shopping around and getting a single additional mortgage rate quote, a borrower can save an average of $1,500.”

“These low rates are also good news for current homeowners. With rates dipping below four%, there are over $2 trillion of outstanding conforming conventional mortgages eligible to be refinanced – meaning the majority of what was originated in 2018 is now eligible,” he says.

The 30-year fixed-rate mortgage (FRM) averaged 3.82% with an average 0.5 point for the week ending June 6, 2019, down from last week when it averaged 3.99%. A year ago at this time, the 30-year FRM averaged 4.54%.

The 15-year FRM averaged 3.28% with an average 0.5 point, down from last week when it averaged 3.46%. A year ago at this time, the 15-year FRM averaged 4.01%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.52% with an average 0.4 point, down from last week when it averaged 3.60%. A year ago at this time, the 5-year ARM averaged 3.74%.

Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.

Summary

Markets had a good week last week. The Dow Jones Industrial Average rose 4.71% to 25,983.94. The S&P500 ended up 4.41% to 2,873.34, and the Nasdaq Composite finished up 3.88% to 7,742.10. The annual yield on the 30-year Treasury fell 1.2 basis points to 2.57%.

Economic data for the week included positive results in ISM non-manufacturing, while ISM manufacturing lost a bit of ground for the prior month. The employment situation report for May also came in weaker than expectations.

U.S. and foreign equity markets recovered sharply last week, with hopes of the Fed lowering interest rates in response to growing economic headwinds. Bonds also fared positively, as rates declined across the yield curve. Commodities were mixed, with oil prices recovering slightly.

Economic Notes

(-) The ISM manufacturing index report for May declined -0.7 of a point to 52.1, compared to expectations of a minor gain to 53.0. The underlying composition looked better than the headline, with new orders, employment and new export orders rising by over a point each, while production fell a point, but remained in expansion, as did supplier deliveries and inventories. Prices paid also continued in expansion by rising several points. While the overall index remained in growth territory, it’s the lowest result in 2 ½ years. Unsurprisingly, respondents to the survey noted ongoing concerns over U.S.-China trade tensions, which raises uncertainty particularly for segments of the economy such as manufacturing.

(+) The ISM non-manufacturing index for May, on the other hand, rose by 1.4 points to 56.9, surpassing the 55.4 level expected by consensus. Business activity, new orders and employment all rose to continue in the high-50’s to low-60’s expansionary zone. New export orders and supplier deliveries fell, with the latter now in contraction slightly, at just under 50.

(-) Construction spending for April was unchanged, which disappointed relative to expectations calling for an increase of 0.4%, in addition to several revisions higher for prior months. Public construction represented the sole gaining area, up 5% for both residential and non-residential, while private spending fell in all areas.

(0) The trade balance for April came in largely as expected, narrowing by -$1.1 bil. to -$50.8 bil. In keeping with the recent focus on global trade and tariff implementation, both imports and exports fell by just over -2%, and not largely driven by petroleum. Import declines were driven by weaker capital goods and consumer goods, and exports by capital goods and autos—showing that consumer and business behavior were both affected during the month.

(-) The ADP private-sector employment report for May was described as ‘unique,’ showing a gain of 27k, which fell far short of the 185k level expected and represented the slowest growth in nearly a decade for the index. Services jobs rose by 71k, which were largely offset by a decline in goods-producing employment of -43k (most of which was in the cyclical construction segment). While not perfectly correlated to the larger and more closely-watched government report on Friday, this provides a unique perspective on the private employment portion of the economy. Persistent weakness here would obviously be a red flag, and when combined with other factors, raises the chances of a broader labor slowdown and possible Fed action to cut rates at some point as opposed to raising them.

(0/-) Initial jobless claims for the Jun. 1 ending week were unchanged at 218k, which ended a bit above the 215k level expected. Continuing claims for the May 25 week rose by 20k to 1.682 mil., above the 1.660 mil. expected by consensus. However, no anomalies were reported, with the largest changes occurring in the largest U.S. states.

(-) The employment situation report for May came in quite a bit weaker than expected, which, instead of souring bullish equity growth sentiment, seemed to help the growing swell of market views that interest rate cuts could be coming down the road this year.

Nonfarm payrolls showed a gain of 75k positions, which disappointed relative to expectations of 175k, representing the third weakest monthly reading in the past two years. Job increases were led by the segments of professional/business services (33k) and health care (27k), while construction jobs only rose by 4k, and manufacturing by 3k. On the declining side, state/local government jobs fell by -15k and retail by -8k. Additionally, payroll gains for March and April were revised down significantly, by -75k in total, adding to the weakness of the report. There did appear to be some weather impact in the report, but it was generally weak across a variety of categories.

The unemployment rate was unchanged at 3.6%, while the household survey employment number showed a gain of 113k jobs, due to an increase in the category described as ‘self-employed.’ The labor force participation rate was also flat at 62.8%, while the U-6 measure of underemployment fell by -0.2% to 7.1%.

Average hourly earnings increased by 0.2%, which took the year-over-year increase to 3.1%. The average workweek length was flat at 34.4 hours.

Earlier in the week, the nonfarm productivity number for Q1 was revised down by -0.2% to an annualized 3.4%, increase, below expectations, although the year-over-year rate remained steady at 2.4%. Unit labor costs for Q1 were also revised downward by -0.7% further to -1.6% on an annualized level, exceeding expectations of a -0.9% final figure, despite compensation rising by an annualized rate of 1.8% for the quarter. Interestingly, overall costs fell by -0.8% on a year over year basis.

(0) The Fed’s Beige Book of regional economic conditions for the various Fed banks showed much of the same, with the overall economy appearing to growth at a modest rate over the period spanning from April through mid-May. To no surprise, trade weighed further on the minds of respondents—some segments showed slowing economic activity, although others saw an improvement over the prior period. Manufacturing was noted as positive, despite being the segment most heavily influenced by tariff concerns. Consumer spending was also described as modestly positive, despite some deceleration in auto sales. Employment growth, similar to results seen in other releases, was modest to moderate, although there is a continued shortage of qualified workers in certain high-demand industries. This has been noted by the Fed as of late, in terms of explaining the tempered labor force participation rate, but also sporadic wage gains some sectors but not others. Speaking of which, inflation was described as modest, similar to recent trend levels.

Market Notes

Period ending 6/7/2019 1 Week (%) YTD (%)
DJIA 4.77 12.67
S&P 500 4.46 15.68
Russell 2000 3.36 12.94
MSCI-EAFE 3.23 11.12
MSCI-EM 0.94 4.31
BBgBarc U.S. Aggregate 0.36 5.17
 U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2018 2.45 2.48 2.51 2.69 3.02
5/31/2019 2.35 1.95 1.93 2.14 2.58
6/7/2019 2.28 1.85 1.85 2.09 2.57

U.S. stocks recovered last week, ending a forgettable month of May with its best week of 2019 so far. By sector, cyclically-sensitive materials recovered by nearly 10% for the single week, followed by technology, while communications and defensive utilities brought up the rear—but remained positive.

Technology stocks experienced early weakness due to the House Judiciary Committee announcing an anti-trust review of several tech companies, along with the DOJ and FTC, although market sentiment seemed to look past these isues over subsequent days. This shift was entirely due to hints of possible Fed easing this year, which outshined all other concerns and pushed sentiment positive. (This was driven by FOMC member comments, which could have been taken out of context, as ‘rate cuts’ were not specifically mentioned, only a reiteration of monetary actions ‘as appropriate’ to support the economy, which is their mandate anyway.) Keeping interest rates low naturally lowers the cost of borrowing for companies and governments, while also reducing the discount rate for risk assets—elevating their fundamental fair values.

Foreign stocks again largely performed nearly in line with U.S equities, helped by a weaker U.S. dollar. European stocks were also buoyed by comments from the ECB that put any interest rate increases on hold by at least six months, as well as signaled a new series of financial stimulus to help spur loan growth. This was in response to continued uncertainty regarding global trade, sluggish European growth and a backdrop of tensions surrounding Italy’s larger-than-allowed deficit. Japan lagged Europe and the U.K. by a bit, during a week where the World Bank cut forecasts slightly to 0.8% for 2019. Australia also lowered its key interest rate by a quarter-percent to 1.25%, in order to sustain its ongoing expansion. Emerging markets lagged due to lower prices in China, related to perceived slower economic growth due to trade, and retaliatory measures, while other regions were widely divergent.

U.S. bonds fared positively, with interest rates declining, as a result of the earlier-mentioned Fed comments, which markets took as lowering the bar for stimulus actions this year. Governments and corporates in the U.S. performed largely in line, while high yield outperformed along with risk assets. Foreign developed and emerging market bonds performed similarly in local terms, but a weaker dollar boosted returns by over a percent.

Commodities were mixed on the week, with precious metals and energy higher, while industrial metals lost ground. The price of crude oil gained roughly a percent to just a penny under $54/barrel, with sentiment continuing to be split between higher U.S. supplies and fears of global demand decline. As an indication of crude’s recent volatility, despite a double-digit decline in May, prices remain up nearly 20% year-to-date, while down almost -20% on a trailing one-year basis.

Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.

Sources:  Ryan M. Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, FRED Economic Research, Freddie Mac, 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.  Residential and reverse mortgages are offered through Prestige Home Mortgage in Vancouver, WA.

Notes key:  (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.