Your Weekly Update for Monday, July 29, 2019
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Markets hit record highs last week. The Dow Jones Industrial Average rose 0.14%% to 27,192.45. The S&P500 ended up 1.65% to 3,025.86, and the Nasdaq Composite finished up 2.26% to 8330.21. The annual yield on the 30-year Treasury rose 2.3 basis points to 2.601%.
In a slower week for economic data, gross domestic product for the second quarter, durable goods orders, and jobless claims each came in better than expected. Several housing statistics continued to point to mixed conditions.
U.S. equity markets fared well with positive returns, outperforming foreign stocks, which were held back by a stronger dollar. Bonds were generally flat on the week, with credit outperforming governments, and foreign markets mixed. Commodities lost ground broadly, due to the dollar effect, although energy was the sole exception as crude oil prices ticked modestly higher.
(+) The advance report on Q2 U.S. GDP came in showing 2.1% annualized growth, a few tenths above consensus expectations calling for 1.8%. It appeared consumer consumption was a bright spot in the report (up over 4%), while business fixed investment fell by over a half-percent, due to a decline of -11% in structures investment and weaker purchases of other equipment. Residential investment also fell by over a percent. On the other hand, Federal government spending rose by 8%, which was related to the re-opening of the government (considered ‘growth’ since the partial closure in Q1 resulted in a decline). Net exports also declined by -5%, which was worse than expected, and related to recent trade policy. Due to periodic GDP data adjustments, growth for 2017 was revised upward, and 2018 downward by nearly a half-percent in each direction, nearly netting out in the end.
Inflation, as measured by the core PCE index, came in at an annualized rate of 1.8% for the Q2, which fell below expectations by a few tenths, and certainly below the Fed target of 2.0%. Based on this strong initial report for Q2, estimates for Q3 by many firms are coming in around the 1.5-2.0% range—largely due to an expected normalization of inventories and contained growth effects globally.
(+) Durable goods orders rose 2.0% for the month of June, which outperformed forecasts calling for 0.7%; however, this was tempered by some prior month revisions. Aircraft/parts orders increased 17% on the month, accounting for much of the headline increase, although motor vehicles also helped. Removing this segment from the headline number pulled down the increase to 1.2%, while core capital goods orders came in at 1.9%, which was above the 0.2% gain expected. Core capital goods shipments rose 0.6%, which surprised on the upside compared to an anticipated decline of -0.2%. Although there appeared to be some signs of trade drag, the stats pointed to decent underlying growth. Interestingly, outside of the volatile transportation segment, growth in orders seems to be ramping up, which runs counter to the narrative of economic slowing.
(0) The advance June goods trade balance fell by -$0.9 bil. to -$74.2 bil., but remained wider than the -$72.5 bil. expected. Goods imports declined to a greater extent than exports by about $1 bil., due to a -7% drop in industrial supplies, while consumer and capital goods also declined slightly. Exports also fell, mostly as a result of a -11% drop in the consumer goods category, while capital goods also fell.
(-) The FHFA house price index for May rose by 0.1%, which far less than the 0.4% increase expected. Regionally, two-thirds of the nation’s regions experienced increases, with the South Atlantic and NY/NJ/PA regions gaining nearly a half-percent, while the KY/TN/MS/AL states declined -1%. The year-over-year rate again decelerated, this month by another -0.4% to 5.0% (which still remains robust compared to history on a real/after-inflation level).
(-) Existing home sales for June fell -1.7% to a seasonally-adjusted annualized rate of 5.27 mil., underperforming the -0.4% decline expected through the median forecast. By grouping, single-family fell by -1.5%, while condos/co-ops fell by over -3%. Regionally, the South and West both experienced declines of over -3%, while the Northeast and Midwest each saw increases of around 1.5%. Year-over-year, the sales number is down -2.2%, which continues signify mixed results as availability continues to weigh on sales numbers over the past year, with listings down over -13% from a year ago. On the positive side, lower interest rates have caused the buying environment to ease.
(+) New home sales in June, on the other hand, rose 7.0% to a seasonally-adjusted annualized level of 646k units. However, this fell short of expectations calling for a 9% increase, and revisions for prior months reduced the count by -55k. The West experienced sharply higher sales, the Midwest experienced a moderate decline, while the South and Northeast were roughly flat. The months supply of homes fell -0.4 from May to 6.3 in June, with sales outpacing higher inventories. The median price of new homes came in at $310,400, which was interestingly barely changed from a year prior, while the average price fell -0.4% to $368,600. On a year-over-year basis, new home sales units rose 4.5%, which is an improvement on the difficult growth numbers seen last year, but these remain choppy. From a longer-term perspective, on a population-measured basis, new home sales remain far below ‘normal’ levels.
(+) Initial jobless claims for the Jul. 20 ending week fell by -10k to 206k, which was below the 218k level expected. Continuing claims for the Jul. 13 week fell by -13k to 1.676 mil., below the 1.688 mil. median consensus. No anomalies were noted by the DOL, and levels remain low, in keeping with continued strong employment activity and low layoffs.
|Period ending 7/26/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.03||6.09|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks fared positively again last week, with the S&P 500 and Nasdaq again reaching new highs. This occurred as hopes for interest rate cuts and decent stock earnings results kept sentiment high. By sector, technology and financials fared best, in keeping with earnings results—the latter by a stronger-than-expected by Alphabet/Google, which included a large share buyback announcement. Defensive sectors utilities, health care and consumer staples were the sole losing groups on the week.
Speaking of earnings, it was a busy week for Q2 results. Per FactSet, just under half of the firms in the S&P 500 have now reported, with nearly 80% noting a positive surprise on the EPS side and 60% on the revenue side. While most earnings surprises have come from technology and financials, the overall earnings growth level for the index is -2.6% thus far, on a year-over-year basis. To no surprise, firms with more global revenue exposure have underperformed—those with over 50% revenue from foreign sources have seen EPS fall -14%, while those with over 50% revenue from the U.S. have actually seen 3% EPS growth for the quarter. With expectations still fairly robust for the remainder of the year, the forward-looking price/earnings ratio at this point is 17.1x, above the 10-year average of 14.8x and long-term rough average of 15-16x.
Although it seemed to fly under the radar a bit, it was announced that the President and Congress have reached an agreement to suspend the debt limit for the next two fiscal years, and raise spending caps (to about $170 bil. over the next few years). While this agreement still requires full Congressional approval in both chambers, which will likely happen in coming days/weeks, this was resolved with a lot less drama than many feared, given the acrimonious relationship between the two parties. This removes one potential uncertainty from market dynamics in coming months, which some strategists had been a bit worried about.
Foreign stocks in developed nations gained in local currency terms, albeit not to the degree of U.S. stocks, but the impact was muted after translated for currency effects. On net, Europe was flat, followed by minor losses in Japan and the U.K., while emerging markets declined nearly a percent. As opposed to dollar strength in its own right, euro weakness appeared to be one catalyst, as the ECB kept their key interest rate unchanged, but noted that the economic statistics there were deteriorating, so was ready to cut rates soon as needed, based on data. This would represent the first outright cut in three years, with short-term rates already hovering around -0.4%. While easy policy normally boosts market sentiment, there appeared to be some disappointment at this less aggressive response, including an escalation of asset purchases to dampen long-term rates. Sentiment has also been mixed in Britain with the election of Boris Johnson as the new prime minister, resulting in several cabinet resignations following his announcement that a ‘no-deal’ Brexit possibility would remain on the table. Emerging markets were mixed to negative, with positivity in China based on continued U.S.-China trade progression and a diplomatic visit, while Mexico and Latin America have been bogged down by continued problems with state-owned energy company Pemex.
The IMF cut its global outlook down another tenth of a percent to 3.2% for 2019 and 3.5% in 2020. For the most part, these were triggered by ongoing trade tensions, as well as technology tensions that have bogged down global supply chains (Huawei being a key example), and continued chances of a no-deal Brexit.
U.S. bonds were generally flat, with little movement on net across the yield curve. Investment-grade corporates outperformed treasuries slightly, as credit spreads contracted over the week, with high yield bonds faring best, up over a half-percent. As the U.S. dollar gained nearly a percent last week, foreign bonds in developed markets fared poorly, losing ground with little yield cushion, while emerging market USD debt gained in similar manner to high yield, offsetting losses in EM local debt.
Commodities generally lost ground on average as the dollar gained sharply, with all sub-sectors losing ground except for energy. Within the energy space, natural gas fell over -4%, while the price of crude oil rose just under a percent to just over $56/barrel. With no new geopolitical news to upend oil markets, it appeared that slightly lower U.S. rig counts could have contributed.
Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates continued to hover near three-year lows and purchase application demand has responded, rising steadily over the last two months to the highest year-over-year change since the fall of 2017. While the improvement has yet to impact home sales, there’s a clear firming of purchase demand that should translate into higher home sales in the second half of this year.”
The 30-year fixed-rate mortgage (FRM) averaged 3.75% with an average 0.5 point for the week ending July 25, 2019, down from last week when it averaged 3.81%. A year ago at this time, the 30-year FRM averaged 4.54%.
The 15-year FRM averaged 3.18% with an average 0.5 point, down from last week when it averaged 3.23%. A year ago at this time, the 15-year FRM averaged 4.02%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.47% with an average 0.4 point, down from last week when it averaged 3.48%. A year ago at this time, the 5-year ARM averaged 3.87%.
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.
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 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, T. Rowe Price, 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.