Your Weekly Update for Monday, August 26, 2019
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Have a great week!
Mike Elerath
National Social Security Advisor
Bill Roller
Chartered Financial Analyst
Certified Financial Planner
Chartered Market Technician
NMLS #107972
Summary
It was another tough week for markets last. The Dow Jones Industrial Average fell 0.99% to 25,628.90. The S&P500 ended down 1.44% to 2,847.11, and the Nasdaq Composite finished down 1.83% to 7,751.77. The annual yield on the 30-year Treasury rose 2.5 basis points to 2.025.
In a lighter week for economic news, the index of leading economic indicators reversed course and showed a monthly gain—lowering odds of an upcoming recession. Other positive news included existing home sales coming in better than expected, while new home sales declined, but largely due to positive revisions from the prior month.
U.S. equity markets lost ground worldwide as trade tensions continued to vacillate, while foreign stocks fared slightly better. Bonds were flat to higher as interest rates changed minimally on the week. Commodities lost ground, primarily in the agricultural and industrial metals segments, while precious metals fared well.
Economic Notes
(+) The Conference Board’s Index of Leading Economic Indicators for July came in with a 0.5% monthly gain, bucking slight declines during the prior two months. The coincident index also rose in July, by 0.2%, as did the lagging indicator, by 0.6%. During the month, positive influences of housing permits, jobless claims, stock prices, and credit contributed the most to growth, while weak manufacturing and the inverted yield curve continued to weigh on the measure.
Interestingly, the annualized rate of growth for the leading index during the past six months increased to 1.6%, which matches the pace of the immediately prior semiannual period. While not foolproof by any means, the LEI series serves as a useful compilation of several data points historically correlated to changes in economic cycles. Per this measure at least, probabilities of a near-term recession have again shrunk.
(0) Existing home sales rose 2.5% in July to a seasonally-adjusted rate of 5.42 million annualized units, which was on par with expectations. The single-family unit component rose 3%, while co-ops/condos were flat. Regionally, sales in the West gained 8%, the South and Midwest saw minimal gains, while the Northeast experienced a decline of -3%. While the month-to-month numbers remain choppy per usual, the year-over-year gain came in at 0.6%. The median home sales price rose 4.3% from a year ago, to $280,800, with July representing the 89th straight month of positive price increases. This continued to be fueled by falling interest rates, with fixed-rate mortgages pegged to the 10-year treasury. However, on the negative side, inventories have begun to decline further, with supply at 4.2 months. As summarized in the release by the National Association of Realtors, ‘more building is needed.’
(-) New home sales in July fell by -12.8% to a seasonally-adjusted annualized rate of 635k, which underperformed relative to the 647k expected; however, prior month results were revised higher by roughly the same percentage, which neutralized much of the change. (In fact, post-revision, June’s numbers were the highest since 2007 for a single month.) Regionally, the South and West experienced sharp declines, while sales in the Northeast rose a bit. Over the prior year, sales are up 4.3%. Months supply inventories for new homes have fallen from 7.4 in January to now 6.4, which is still up from the long-term historical inventory figure of around 4 months.
(+) Initial jobless claims for the Aug. 17 ending week fell by -12k to 209k, below the 216k level expected by consensus. Continuing claims for the Aug. 10 week also fell, by -54k, to 1.674 mil., a good deal below the 1.707 mil. level median forecast. Half of the drop in initial claims took place in California, not uncommon due to its size, while no other anomalies were reported. Overall layoff data continues to look extremely benign.
(0) The FOMC minutes from the July meeting were look at with interest, given the changing in monetary policy to an easing regime, as well as the two dissents from committee members—implying that the decision was not necessarily without controversy. The minutes noted that this policy action was best seen as a ‘mid-cycle adjustment’ or ‘recalibration’ of policy stance, as opposed to a pre-set pattern to necessarily include several rate cuts. At the same time, the positive assessment of the economy continuing to grow at a moderate pace were offset by the ongoing hurdle of trade tensions. Inflation continued to be described as ‘muted,’ with continued discussion as to the best methods for treating the 2% target—and how the definition of ‘symmetry’ would be handled around that target.
Market Notes
| Period ending 8/23/2019 | 1 Week (%) | YTD (%) |
| DJIA | -0.98 | 11.64 |
| S&P 500 | -1.42 | 15.08 |
| Russell 2000 | -2.27 | 9.17 |
| MSCI-EAFE | 0.86 | 8.68 |
| MSCI-EM | 0.35 | 0.82 |
| BBgBarc U.S. Aggregate | 0.08 | 8.87 |
| 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 |
| 8/16/2019 | 1.87 | 1.48 | 1.42 | 1.55 | 2.01 |
| 8/23/2019 | 1.97 | 1.51 | 1.40 | 1.52 | 2.02 |
U.S. stocks lost ground for the fourth week in a row. Early in the week, while long-term treatment of trade and supply chain linkages with Chinese telecom firm Huawei remain in flux, the temporary license issued by the U.S. Dept. of Commerce to allow U.S. companies to trade with the firm was extended for another 90 days, which removed a key piece of technology-related uncertainty. Despite the administration’s preference to move away from any type of cooperation with Huawei, which is deemed a national security and intellectual property transfer risk, they’re currently one of the few global firms taking the lead in new 5G technology. China also announced retaliatory tariffs later in the week, on goods totaling $75 bil., including a 25% tax on U.S. autos, in response to coming U.S. tariffs in Sept. and Dec. By Friday, President Trump’s order to U.S. companies to begin looking for ‘alternatives to China’ sent stocks lower by -3%, with a large degree of uncertainty over what that actually meant and what measures it would take to achieve it.
Eyes turned to Jackson Hole, WY, where the annual Fed symposium consisted of research presentations by various academics, discussions of policy options and a keynote from Chair Powell, which is usually closely watched for clues for policy clarifications. He described the current geopolitical environment as complex and turbulent, featuring ‘significant risk.’ However, he was also ambiguous as to whether or not such uncertainty warranted further rate cuts or the degree of any decided-upon further cuts, since the FOMC membership seems split on the issue. On one hand, this sounds disconcerting for investors trying to get a handle on policy direction, but also reflects that the decently-humming economy may not warrant drastic action.
By sector, utilities and consumer discretionary were the only groups with a positive return for the week, unique for the latter, which tends to be ‘higher-beta,’ but was boosted by stronger-than-expected earnings for large index constituents Target, Home Depot and Lowe’s. The more cyclical areas of materials, financials, and energy suffered most, along with healthcare.
Foreign developed market stocks fared better than domestic issues, helped by a weaker dollar, which provided several tenths of a percent of return. The Eurozone and U.K. were little changed in local terms, helped by expectations for more quantitative easing in the EU and some apparent progress made between the U.K. and European officials regarding Brexit. A stronger-than-expected GDP report in Japan appeared to help returns there. Emerging markets stocks on net fell in line with developed in local terms, but weaker currency impact pulled returns down slightly. The key outlier was a decline in Brazil, affected by political sentiment, fires in the Amazon, and proximity to problematic Argentina, which lost further ground last week. Chinese stocks, on the other hand, gained several percent due to stronger earnings and additional central bank easing measures.
U.S. bond indexes gained slightly, despite the decline in equities. With treasuries ending the week flattish, corporates of all types—investment-grade, high yield and bank loans—all gained. Despite a stronger dollar, foreign bonds all lost ground, with emerging market local debt faring the worst at nearly -1%. Interestingly, Italian debt ended the week with a 10-year yield at around 1.3%, as the prime minister resigned, a half-percent lower than a week ago.
Real estate declined by about a percent, in keeping with broader equities, and bucking the trend of recent stronger and less-correlated performance relative to other risk assets. The weaker dollar helped foreign REITs earn positive returns, however.
Commodities generally fell last week, despite a weaker dollar, which usually acts as an upward catalyst. The drop was led by weak pricing for agricultural contracts (with crop yields expected to be stronger than expected) and industrial metals (due to ongoing trade issues). The uncertainty continued to benefit precious metals, which gained a percent on the week. The price of crude oil fell by roughly a percent to just over $54/barrel.
Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, says, “The drop in mortgage rates continues to stimulate the real estate market and the economy. Home purchase demand is up five% from a year ago and has noticeably strengthened since the early summer months, while refinances surged to their highest share in three and a half years. Households that refinanced in the second quarter of 2019 will save an average of $1,700 a year, which is equivalent to about $140 each month.”
“The benefit of lower mortgage rates is not only shoring up home sales, but also providing support to homeowner balance sheets via higher monthly cash flow and steadily rising home equity,” he continued.
The 30-year fixed-rate mortgage averaged 3.55% with an average 0.5 point for the week ending Aug 22, 2019, down from last week when it averaged 3.60%, and the lowest it’s been since November 2016.. A year ago at this time, the 30-year FRM averaged 4.51%.
The 15-year FRM averaged 3.03% with an average 0.5 point, down from last week when it averaged 3.07%. A year ago at this time, the 15-year FRM averaged 3.98%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.32% with an average 0.3 point, down from last week when it averaged 3.35%. A year ago at this time, the 5-year ARM averaged 3.82%.
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.