Your Weekly Update for Monday, September 30, 2019
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Mike Elerath
Certified Financial Planner
National Social Security Advisor
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Certified Financial Planner
Chartered Market Technician
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Summary
Markets were down again last week. The Dow Jones Industrial Average fell 0.43% to 26,820.25. The S&P500 ended down 1.01% to 2,961.79 while the Nasdaq Composite finished down Ā 2.19% to 7,939.63.Ā The annual yield on the 30-year Treasury fell 7.5 basis points to 2.124%.
Economic data for the week included positive results for personal income and spending, as well as durable goods orders, jobless claims, and a variety of housing metrics. Consumer confidence measures were mixed, however.
Global equity markets declined to varying degrees last week, with lack of positive progress on U.S.-China trade and potential for a brewing political crisis in the U.S. Governments bonds fared better, as investors fled risk, outperforming corporate and foreign debt. Commodities generally declined along with a stronger dollar, including a sharp decline again in crude oil as supply concerns waned.
Economic Notes
(0) The third and final report for Q2 GDP was unrevised from the second edition, remaining at 2.0%. Under the hood, personal consumption growth and business fixed investment were both revised downward by a bit; however, net exports and government spending increased from the last estimate, to offset that effect. Corporate profits as a component were also revised down in this estimate by -1.5% to 3.8%, and they remain up barely over 1% on a year-over-year basis. Price inflation was also revised up slightly, but this rounded out to very little change, with core PCE coming in at an annualized 1.9% for the quarter. Estimates for Q3 GDP remain in the similar range, around 2.0-2.5%, by many Wall Street economists, while the New York GDP Nowcast and Atlanta Fed GDPNow models each anticipating 2.1% as of last week.
(0) Personal income for August rose by 0.4%, which generally matched expectations, and led by wage and salary increases up 0.6%. Personal spending, however, only gained 0.1%, which lagged expectations calling for a 0.3% increase, in addition to a revision down for the prior month. The personal savings rate rose by 0.3% to 8.1%. Over the past year, personal income is up just under 5%, while spending has increased a bit below 4%. The PCE price indexes, the series most closely monitored by the Fed due to their particular composition, ticked by a few hundredths of a percent on a headline level and just over 0.1% on a core measure. Year-over-year, this took the headline and core rate of change to 1.4% and 1.8%, respectively.
(+) Durable goods orders for August rose by 0.2%, which exceeded consensus expectations calling for a decline of -1.1%. Removing transportation, however, the gain ticked up to 0.5%, with strength in fabricated metal products, and offset a decline in similar magnitude the prior month. Core capital goods orders, which remove the most volatile groups, fell by -0.2%, compared to forecasts calling for no change. Core capital goods shipments rose 0.4%, slightly surpassing the 0.3% expected, and have seemed to have picked up over the last several months. Durable goods inventories also rose 0.3% during the month. From a year ago, total durable goods orders are down -3%, while flat for the ex-transportation figure.
(0) The advance August trade balance showed a widening of -$0.3 bil. to -$72.8 bil., but not as wide as the -$73.4 bil. level expected. Goods imports rose at a faster pace than exports, due to consumer goods and capital goods other than the auto sector, while industrial supply and auto imports declined. Export gains included a 3% rise in industrial supplies, but capital goods exports declined by a nearly equivalent amount.
(-) The S&P Case-Shiller home price index was unchanged in July, falling just below the 0.1% expected gain. Despite the lackluster headline result, all but three of the 20 cities experienced gains, led by San Diego, Seattle, and Charlotteāeach rising a half-percent for the monthāwhile New York and Los Angeles declined by nearly a half-percent. The trailing 12-month rate of change ticked down by two-tenths to 2.0%, which is the lowest growth rate in seven years, but more along the lines of the long-term historical average of minimal after-inflation ārealā return.
(+) The FHFA house price index rose 0.4% in July, which outperformed the median forecast calling for 0.3%. Values rose in all nine regions for the month, led by the Mountain states and New England, with gains around 1%. In contrast to the Case-Shiller data focused on key urban centers, the year-over-year rate for the broader FHFA ticked up a tenth to 5.0%, which is quite strong relative to historical averages.
(+) New home sales for August rose by 7.1% to a seasonally-adjusted annualized level of 713k, in addition to some revisions upwards for prior monthsāthis beat expectations calling for 659k. By region, the West and South experienced gains of around 25k for the month, while the Midwest and Northeast declined by a few thousand. Interestingly, while existing home sales have climbed back up to peak levels as measured by the early 2000ās, new home sales remain at only three-quarters or so of levels from that time. Year-over-year, sales are up 18%, which is meaningful. Months supply ticked down a half-year to 5.5 for the month, while the median selling price for new homes was $328,400, up 2.2% from last year.
(+) Pending home sales bounced back in August, gaining 1.6%, beating forecasts calling for a 1.0% increase. Every region experienced an increase, with the West leading at over a 3% rise, while the Midwest trailed at around a half-percent. Year-over-year, the rate of change for pending sales tempered by about a half-percent to 1.1%. The overall increase points to potentially positive existing home sales numbers in coming months, but housing continues to plug along generally at an inconsistent rate, driven by a variety of unique cross-currents.
(+) The final September edition of the Univ. of Michigan index of consumer sentiment rose by 1.2 points to 93.2, exceeding the median forecasted level of 92.1. Participant assessments of current conditions rose by a half-point more than future expectations. Inflation expectations for the coming year were unchanged at 2.8%, while those for the next 5-10 years ticked up a tenth of a percent to 2.4%.
(-) The Conference Board index of consumer confidence fell by -9.1 points to 125.1 for September, further beyond the 133.0 level expected by consensus forecast. Perceptions of present conditions and expectations for the future by households both declined, with the latter deteriorating slightly more than the former. The labor differential, which measures the difficulty in finding employment, fell by -5 points as well, although it remains at a cyclically high level.
(0) Initial jobless claims for the Sep. 21 ending week ticked up by 3k to 213k, which was just above the median forecast of 212k. Continuing claims for the Sep. 14 week, on the other hand, declined by -15k to 1.650 mil., which was below the 1.666 mil. level expected. No anomalies were reported by the government, other than perhaps some normalization following recent hurricane activity in the South Atlantic coastal states. Overall, activity continues to point to a strong labor market.
Market Notes
| Period ending 9/27/2019 | 1 Week (%) | YTD (%) |
| DJIA | -0.43 | 17.08 |
| S&P 500 | -0.98 | 19.94 |
| Russell 2000 | -2.45 | 13.95 |
| MSCI-EAFE | -0.66 | 13.18 |
| MSCI-EM | -1.94 | 3.70 |
| BBgBarc U.S. Aggregate | 0.37 | 8.47 |
| 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 |
| 9/20/2019 | 1.91 | 1.69 | 1.61 | 1.74 | 2.17 |
| 9/27/2019 | 1.80 | 1.63 | 1.56 | 1.69 | 2.13 |
U.S. stocks generally lost ground on the week, with large caps outperforming small caps. By sector, defensive consumer staples and utilities outperformed, with gains over a percent, while communications services, energy and health care all experienced losses approaching -3%.
Markets fell Tuesday by a percent in response to the Presidentās antagonistic tone toward China in a United Nations speech, mostly that a ābad dealā would not be accepted, creating a more pessimistic tone at that venue than some had expected. This countered hopes for a positive outcome from trade talks, scheduled to resume Oct. 7. The announcement of an impeachment inquiry against the President by House Speaker Pelosi also pulled down sentiment, as details of the Ukrainian call came to light. This was reminiscent of just over 20 years ago when the Clinton impeachment proceedings were announced (similarly, causing a rapid drop during the day of announcement but more tempered market reaction overall in the period following the shock).
By Friday, another round of negativity surrounded the Trump administration possibly restricting U.S. investor flows into China, as well as the more extreme measure of delisting Chinese companies from U.S. stock exchangesārepresenting an unexpected element in the ongoing trade dispute. This affected sentiment for large Chinese companies Alibaba and Tencent in particular.
The pulling of the IPOs for WeWork and Endeavor, as well as lukewarm market responses to the new IPOs for fitness company Peloton and dental firm SmileDirectClub, were a surprise to some. Initial public offerings are expensive affairs, and tend to be pulled only when potential investor interest is so poor and/or market pricing is insufficient to meet capital raising targets. It appears investors are becoming more fickle in terms of what is acceptable for stocks going public, demanding reasonable valuations and even current earnings, which is in contrast to conditions a few years ago when the āstoryā appeared more important than current fundamentals. Fears over weakened economic growth might not be helping matters for the more speculative names.
Foreign stocks in developed markets were flat to slightly positive in local terms, but declined in keeping with equities in the U.S. after accounting for a stronger U.S. dollar. U.K. markets gained nearly a percent as the high court ruled a recent suspension of parliament by the prime minster was illegal, raising odds of a āno dealā Brexit, or another extension, by the stated deadline of Oct. 31. At the same time, the eurozone flash PMI fell to its worst level in seven years, which continues to raise the odds for continued and prolonged monetary easing. (In fact, global PMI has been in contraction for four months straight.) Japan and the U.S. reached a limited trade deal, which offset data showing a manufacturing contraction and uncertainty surrounding the consumption tax increase. The latter is slated to rise from 8% to 10% in October, which a few economists feel has the potential to drive the economy back into recession (from an already low pace of growth). Emerging markets came up in the rear, with declines in local terms as well. China fared the worst, losing several percent on the lack of progress in trade talks and proposed loss of investor flows from U.S. investors, followed by Russia and Mexico, due to lower commodity prices. Indian shares gained upon implementation of a corporate tax cut to similar magnitude of that in the U.S.
U.S. bonds ticked slightly higher for the week as investors shied away from risk, which dampened interest rates on the longer-end. Longer-term treasuries again outperformed with minor gains, while high yield corporate and floating rate bank loans lost some ground. Foreign bonds in developed markets were little-changed on net, held back by a stronger dollar, while emerging market bonds lost ground in keeping with most risk assets on the week.
Real estate in the U.S. rose last week, in contrast to broader equity markets, but in line with defensive segments performing decently. Foreign REITs provided positive returns, but lagged, not helped by a stronger dollar.
Commodities generally fell under pressure of a dollar that rose nearly a percent last week. The energy sub-group declined, as did industrial metals and precious metals, while agriculture rose slightly. The price of crude oil fell by nearly -4% to around $56/barrel as Saudi Arabia announced a partial ceasefire with the Houthi rebels in Yemen, responsible for recent damage to oil drilling and production facilities.
Mortgage Rates
Sam Khater, Freddie Macās Chief Economist, says, āWith both the unemployment rate and mortgage rate below four% and near historic lows, it is no surprise that the housing market regained momentum with home sales and construction at or near decade highs. The fall housing market is poised to continue with steady gains in prices and solid sales activity.ā
The 30-year fixed-rate mortgageĀ averaged 3.64% with an average 0.6 point for the week ending September 26, 2019, down from last week when it averaged 3.73%. A year ago at this time, the 30-year FRM averaged 4.72%.
The 15-year fixed-rate mortgageĀ averaged 3.16% with an average 0.5 point, down from last week when it averaged 3.21%. A year ago at this time, the 15-year FRM averaged 4.16%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgageĀ (ARM) averaged 3.38% with an average 0.4 point, down from last week when it averaged 3.49%. A year ago at this time, the 5-year ARM averaged 3.97%.
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 theĀ 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 atĀ 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 & Poorās, 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.