Your Weekly Update for Tuesday, September 3, 2019
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Chartered Market Technician
US markets were closed yesterday, Monday, September 2 in honor of Labor Day. Markets recovered slightly last week on lessening fears of a trade war with China. The Dow Jones Industrial Average rose 3.02% to 26,403.28. The S&P500 ended up 2.79% to 2,926.46, and the Nasdaq Composite finished up 2.72% to 7,962.88. The annual yield on the 30-year Treasury fell 5.5 basis points to 1.970%.
Economic news for the week included a slight revision downward in U.S. GDP for the prior quarter, stronger than expected results for durable goods orders and personal spending, while jobless claims and consumer confidence weakened.
Equity markets in the U.S. and overseas rose on stronger sentiment and hopes about trade talks making progress. Bonds also gained, although interest rate changes were less dramatic than in recent weeks. Commodities rose generally, although the performance of the sub-groups was mixed.
(0) The second estimate of Q2 U.S. GDP was revised down a tenth of a percent to 2.0%, on par with expectations. The details were a bit stronger, though, with growth in personal consumption revised higher by nearly a half-percent to 4.7%—its strongest pace in five years. Offsetting revisions lower were seen in housing, state/local government spending, as well as inventories. Inflation fell slightly in the quarter from the first estimate by a few basis points, with core PCE remaining at a rounded 1.5% rate of change on a year-over-year basis.
Estimates for GDP growth in coming quarters remain in a tempered, albeit broad range of 1.5-2.5%, now that the impact of weakness in Europe and other global regions has funneled through. Corporations appear to be holding back on capital spending, although consumers have not been to the same degree. The estimated impact of the U.S.-China trade spat continues to rise, from just a few tenths of a percent, to now up to 0.7% or so, assuming full tariff rates are put into place by December. While not catastrophic, these remain a sizable percentage of total economic growth when at such low absolute levels.
(0) In July, personal income rose by 0.1%, short of expectations calling for 0.3%, while personal spending beat forecasts by a tenth with 0.6% growth. This caused a minor decline in the personal savings rate of -0.3% to 7.7%. Year-over-year, personal income and spending have risen at rates of 4.6% and 4.1%, respectively. PCE inflation rose 0.2% on both a headline and core basis in July, bringing the trailing 12-month figure to 1.4% and 1.6% for core, respectively—both well under Federal Reserve targets.
(+) The Chicago PMI rose 6.0 points from a contractionary level in June and July to an again-expansionary 50.4 for August, beating forecasts calling for 48.1. Production, new orders and order backlogs all rose several points in keeping with the overall index; however, supplier deliveries and inventories dropped several points. The anecdotal question for the month was regarding plans for business investment for the remainder of 2019, with roughly two-thirds of respondents anticipating no change, with global uncertainties remaining the key hurdle, while another quarter planned to increase business investment.
(+) Durable goods orders for July rose by 2.1%, beating expectations calling for a more tempered 1.2% increase. This was led by a 44% increase in aircraft/parts, which is a notorious culprit for lumpy monthly results. However, removing that positive impact, the headline number declined to -0.4%. Core durable goods orders, however, rose by 0.4%, which beat forecasts calling for no change. Core capital goods shipments fell -0.7%, falling short of the median forecast calling for a slight gain of 0.1%. Orders are up 0.7% on a year-over-year basis including transportation, while the figure falls to -0.1% with that segment excluded.
(+) The advance goods trade balance tightened by $1.8 bil. to -$72.3 bil. in July, beyond the -$74.4 bil. level expected by consensus estimate. Imports of goods fell by just under -$1 bil., led by capital goods other than autos. Exports rose by the same net amount, with a 10% gain in the consumer export segment, which offset a -4% drop in industrial supplies.
(-) The FHFA house price index for June rose 0.15%, falling just short of the 0.2% increase expected on an unrounded basis. Prices rose in two-thirds of the nine regions, with the West South Central (OK, AR, TX, LA) and East South Central (KY, TN, MS, AL) regions each gaining up to a percent; however, the New England states experienced a half-percent decline. On a year-over-year basis, the national index continued to decelerate, down -0.5% from last month’s pace, to 4.7%, which remains exceptionally strong from a historical perspective.
(-) The S&P/Case-Shiller home price index of 20 key U.S. cities was unchanged in June, which also underperformed expectations calling for a 0.1% gain. Prices rose in all but three of the cities in the index, with Boston and Phoenix leading with gains over a half-percent, while New York prices fell a half-percent to lag the pack. The trailing 12-month growth rate fell here as well, by -0.3%, to 2.1% on a national level. Interestingly, in contrast to the fast pace of recovery in prices since the Great Recession, where 4-6% annual returns were common, the recent results are more in keeping with long-term historical averages. Professor Robert Shiller at Yale University has maintained a database of housing prices covering over a century, which has shown that after-inflation ‘real’ home price appreciation has averaged just under 0.5% over that extended period—far below the pace of the last few cycles. In fact, along with the boom years just prior to 2007, and the period immediately following World War II, the recent post-2009 recovery represents the strongest residential real estate market of the last century.
(-) Pending home sales in July fell by -2.5%, which lagged the median forecast, which called for no change. Pending sales declined in all four national areas, with the West down most at -3%. The year-over-year number turned positive, however, at 1.7%. As a predictor of existing home sales in months following the report, this continues to point to a mixed picture of housing activity, which has struggled with demographics, low affordability, low inventory, and lessened building activity in many key areas. A variety of unique factors appear to be at play, with somewhat weaker tax incentives for homeownership following the tax cut plan, difficulty in finding enough skilled labor to build homes, as well as a continued tight regulatory environment for building permits and generally higher costs.
(-) The final University of Michigan consumer sentiment reading for August fell by -2.3 points to 89.8, below the 92.4 reading forecasted, although this was the lowest level in three years. Opinions of both current conditions and future expectations fell by roughly equivalent amounts. Expectations for inflation over the coming year were unchanged at 2.7%, as were those for the next 5-10 years at 2.6%.
(+/0) The Conference Board consumer confidence index fell by -0.7 of a point in August to 135.1, beating expectations for a larger decline to 129. The sub-index of perceived present economic conditions rose by 6 points, which was offset by a decline in expectations for the future by a roughly equivalent amount. On the positive side, the labor differential, which measures the availability and ease of finding employment, rose by 6 points to a new high for this cycle. This measure can be spotty month-to-month, but, unsurprisingly, longer-term changes in consumer sentiment have tended to be positively correlated to higher levels of income, lower unemployment, and lower real rates of interest (as the average consumer is more sensitive to borrowing costs than yields on savings accounts). Gasoline price changes have also appeared to play a role in shorter-term sentiment, due to the variable impact on budgets.
(-) Initial jobless claims for the Jul. 27 ending week rose by 4k to 215k, just exceeding the 214k level expected. Continuing claims for the Jul. 20 week rose by 22k to 1.698 mil., above the 1.686 mil. level expected. Despite the week-to-week noise of changes in claims, looking at the broader trend, and moving averages, shows that labor conditions remain very favorable, with little layoff activity.
|Period ending 8/30/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.21||9.10|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks rebounded last week, with optimism over U.S.-China trade winning out over pessimism for the time being, highlighted by a Presidential tweet claiming China wanted to make a deal ‘very badly.’ Mid-week, optimism increased due to the likelihood of a near-term meeting between the two, as well as a decision by China to ‘remain calm’ and not further escalate tariffs beyond current levels. (Overall, sentiment has been driven by the U.S.-China trade spat for months, with little substantive news to report, other than markets reacting to shorter-term rumors, hopes and tweets.) Industrials, materials, and communications fared best with 3%+ returns last week, while defensives consumer staples and utilities brought up the rear, although they nearly achieved 2% gains each, which was a minimal lag.
By some metrics, such as a dividend discount model approach, equities have moved from ‘fairly valued’ to ‘attractive’—based solely on movements lower for the pegged risk-free rate, the 10-year treasury note. Absent substantial changes in other inputs, such as earnings expectations or earnings growth rates for future years, discount rates represent an overwhelmingly important contribution to valuations. This phenomenon explains higher multiples which can surface during periods of lower rates and compressed multiples during high-rate periods (such as the early 1980s).
A more unusual piece of news from the corporate world was the most recent meeting of the Business Roundtable, a collection of CEO’s who discuss symbolic issues of common interest. Last month, the group signed a statement claiming that shareholder interests (in contrast to long-standing practice) would no longer be considered paramount. Instead, all ‘stakeholders’—which also includes customers, employees, suppliers, and communities, in addition to shareholders—would be given top priority. While this is in keeping with a trend of deeper interest in ESG topics and desired improvements in corporate behavior, it runs in contrast to traditional thinking as to the purpose of corporations in the first place (to earn a reasonable profit for owners/shareholders). In fact, it’s a repudiation of the long-accepted Friedman Doctrine (espoused by the late economist Milton Friedman), which states the only goal of a corporation should be acting on the behalf of shareholders for profit. While serving this proposed new variety of masters is not always in conflict, there are fears of the threat of pushback and/or unintended consequences if this trend continues to gain traction.
Foreign stocks earned gains, in similar magnitude to those in the U.S., with emerging markets leading the way and the U.K. lagging a bit. U.K. performed surprisingly well considering threats over a suspension of the U.K. Parliament for over a month, the longest shutdown since World War II, in order to ensure anti-Brexit sentiment and any ‘no confidence’ votes on the prime minister himself are kept at bay. Elsewhere in Europe, Italian asset rose with a new political coalition being agreed upon, while the removal of multi-year capital controls in Greece lifted equity sentiment. China experienced gains as sentiment about a trade deal improved again, but Latin America led most other groups.
U.S. bonds ticked a bit higher with little change in the yield curve last week. Due to the rally in risk assets, both investment-grade and high yield corporate credit outperformed governments in the U.S. The U.S. dollar rising over a percent on the week was a negative influence on foreign developed market bonds, which lost ground, and emerging market debt was mixed, based with USD-denominated gaining and local currency bonds declining as one would expect. Year-to-date, bonds continue their pace of an exceptional year, with the Bloomberg BarCap U.S. Aggregate up around 9%, due to the sharp decline in interest rates, but also credit tightening, which has helped performance of corporate debt.
In recent weeks, the U.S. Treasury has been discussing the possibility of issuing an ultra-long-term bond, as in one with a 50- or 100-year maturity. In fact, bonds known as ‘perpetuities’ (as in perpetual, with no maturity date) were issued in the U.K. Bonds of this length have been looked again by a variety of governments in recent years, with some adopting them, but the idea of a very long bond is centuries old. Whether such bonds take root again remains to be seen, but there does seem to be a market for safe assets, which such products would satisfy, along with allowing governments to lock in a historically-low funding rate. One of the downsides, however, is that a bond paying a 2% coupon for 100 years would have a duration of nearly 45 years, although this falls to just over 30 years if issued with a 3% coupon.
Argentina is also seeking to ‘reprofile’ (extend payment maturities) of $100 bil. in debt, the bulk of which is foreign currency-denominated, and largely payable to the IMF. The net size of the debt has exploded due to the recent sharp devaluation of the peso following the surprise election results that pummeled stock and bond markets there. While this is a shade below a full default, and only affects a portion of bonds outstanding, it does get close to the edge, bordering on a restructuring. To put it context, Argentina has defaulted eight times in the past century, although emerging market bond investors always appear to be interested in giving the country another chance (assuming the yield is high enough).
Real estate in the U.S. gained nearly 2%, nearly on par with broader equities, although foreign REITs also experienced positive returns.
Commodities generally fared well for the week, despite the normally-negative influence of the stronger dollar. While agricultural prices declined, with stronger crop yields, and lower prices for precious metals as optimism outweighed pessimism on the week, energy and industrial metals gained. The price of crude oil rose by almost 2% to end at near $55/barrel, although natural gas prices rose 6% in anticipation for the Hurricane Dorian expected to reach Florida in coming days.
Sam Khater, Freddie Mac’s Chief Economist says, “Mortgage rates inched up slightly this week, closing the month with the 30-year fixed-rate mortgage rate averaging 3.6% – almost a full% from the same time last year. Low mortgage rates along with a strong labor market are fueling the consumer-driven economy by boosting their purchasing power, which will certainly support housing market activity in the coming months.”
The 30-year fixed-rate mortgage averaged 3.58% with an average 0.5 point for the week ending Aug 29, 2019, up from last week when it averaged 3.55%. A year ago at this time, the 30-year FRM averaged 4.52%.
The 15-year FRM averaged 3.06% with an average 0.5 point, up from last week when it averaged 3.03%. A year ago at this time, the 15-year FRM averaged 3.97%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.31% with an average 0.4 point, down from last week when it averaged 3.32%. A year ago at this time, the 5-year ARM averaged 3.85%.
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.