Weekly Update 10/21/2019

Your Weekly Update for Monday, October 21, 2019

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Have a great week!

Mike Elerath
CERTIFIED FINANCIAL PLANNER^TM
NATIONAL SOCIAL SECURITY ADVISOR

Bill Roller
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNER^TM
CHARTERED MARKET TECHNICIAN
NMLS #107972

Summary

Markets were mixed last week. The Dow Jones Industrial Average fell 0.17% to 26,770.20. The S&P500 ended up 0.54% to 2,986.20 while the Nasdaq Composite finished up 0.40% to 8,089.54.  The annual yield on the 30-year Treasury rose 3.10 basis points to 2.246%.

Economic news last week included mixed reports on the regional manufacturing and housing front. Additionally, retail sales and industrial production disappointed relative to expectations. The index of leading economic indicators declined slightly, in keeping with data that continues to show a mixed picture.

Equity markets experienced gains globally, based on decent headline earnings reports and some optimism about formalized trade progress. Fixed income was little changed in the U.S. on the week, while foreign bonds outperformed due to a weaker dollar. Commodities were also little changed on the week, with a divergence in the energy space between natural gas and crude oil prices.

Economic Notes

(-) Retail sales fell by -0.3% in September on a headline level, and were unchanged on a core/control basis, when including prior month revisions. Each were weaker than consensus estimates calling for 0.3% increases—the first disappointment on a core level in nearly six months. The headline figure was pulled down by slower auto, gasoline station, and building supply revenues. The core measure was led by strength in clothing/accessories, as well as furniture and personal care, while non-store/online retail lost a bit of ground. Year-over-year, retail sales are up 4% on a headline basis, with the online retail segment still up 13%. Despite the choppier month-to-month data, retail sales trends continue upward generally in keeping with stronger consumer spending relative to that of businesses. Some of this divergence is typical of late business cycle conditions, but the upcoming Holiday shopping season (the annual high point for retailers) will be a bellwether for conditions.

(+) The Empire manufacturing index rose by 2.0 points to a level of 4.0 for October, which surpassed a decline to 1.0 expected by consensus. Under the hood, shipments rose by several points to a strongly expansionary level of 13, in addition to improving assessments of business conditions six months in the future. New orders were unchanged but remained expansionary, while employment fell by a few points—continuing to grow, albeit at a reduced rate. Prices paid continue to expand substantially for the month.

(-/0) The October Philly Fed manufacturing index, on the other hand, fell by -6.4 points to a level of 5.6—lower than the expected 7.6—but remaining in expansion. New orders rose by a point to move more solidly into expansion, as did employment (to an all-time peak), as did expected business conditions over the next six months. On the other hand, shipments fell by several points but remained solidly growing, and prices paid fell sharply but stayed in expansion.

(-) Industrial production in September reversed the prior month’s gain by falling -0.4%, slightly surpassing the -0.2% drop expected. Manufacturing production fell by -0.5%, led by a -4% decline in the auto segment (blamed on the ongoing GM strike), although other sectors also fell back a bit, such as business equipment. The mining group fell by over a percent, while utilities rose just over a percent, due to the effects of warmer weather (and air conditioning needs). Capacity utilization fell by -0.4% for the month, coming in at 77.5%. While choppy, it appears industrial production over the past several months has proceeded at a better pace than the year-over-year growth rate implies, which was heavily influenced by the sharper decline earlier in the year.

(-) Housing starts for September fell -9.4% to a seasonally-adjusted annualized rate of 1.256 mil., falling below the median forecast calling for a -3.2% drop to 1.320 mil. However, this was led by a nearly -30% month-over-month decline in multi-family starts, while single-family starts rose by several tenths of a percent. Overall starts fell in every region, led by the Northeast, down nearly -35%, and Midwest, down close to -20%, while declines in the South and West were far more tempered. Starts are up just under 2% from this time a year ago, with single-family up 4%, while multi-family starts are down -5%. Building permits fell -2.7% to a 1.387 mil. seasonally-adjusted annualized rate, which was slightly better than the -5.3% decline forecasted. Here, a similar pattern developed, with multi-family permits down -8%, while single-family rose close to 1%. Regionally, Northeast permits fell by over -25%, while the West gained 10%. Over the trailing 12 months, single-family permits have risen 3%, while multi-family are up over 17%. Overall, the housing market continues to lag expectations, although there are some signs of life, with fewer homes being produced than are needed based on upcoming demographic demand and scrappage of old homes.

(+) The NAHB homebuilder index rose by 3 points to a level of 71 in October, beating expectations calling for an unchanged 68 reading. Current sales and prospective buyer traffic each increased by several points, while future sales gained a solid 6 points. Regionally, the West and South each experienced gains of several points, while the Northeast lost ground most significantly. While based on homebuilder sentiment, subject to change, this could bode well for housing start activity in coming months.

(-) The Conference Board Index of Leading Economic Indicators fell by -0.1% in September, representing the third straight month of decline, although the magnitude has decelerated. Weakness in the manufacturing sector and inverted yield curve were the primary negative culprits on the month, which were not completely offset by strength in stock markets and credit—according to the official commentary. On the other hand, the coincident indicator was unchanged for the month, while the lagging indicator rose 0.1%. On a 6-month basis, the leading indicator rose 0.4% on an annualized basis, which was roughly a similar pace to the prior 6-month period. The coincident indicator rose at a 1.1% annualized rate for the same semiannual period, which was far slower than the 1.9% for the prior six-month period. As usual, this index consists of information already released, and mirrors the general slowdown theme, but also demonstrates the seemingly non-extreme pace of change at this time.

 

(0) Initial jobless claims for the Oct. 12 ending week rose by 4k to 214k, which was just a shade under the 215k level expected. Continuing claims for the Oct. 5 fell by -10k to 1.679 mil., which was just over the 1.675 mil. expected by consensus. The General Motors strike effect may be waning, while the overall figures otherwise are little-changed and in line with a strong labor market.

(0/-) The Fed Beige Book of regional economic conditions reflected that growth slowed to a pace of ‘slight-to-moderate’ during the September through early October period. This was a downgraded pace relative to prior Beige Book reports, although expectations for some degree of expansion still exist, and it was nowhere near as catastrophic as it could have been given the sour headlines. Manufacturing activity ticked down, in keeping with broad sentiment data otherwise reported, and reflecting some company concerns over the outcome of U.S.-China tariff negotiations. Job markets continued to show strength overall, but labor shortages are increasingly apparent in some industries, which kept wage increases persistent. Consumer spending continued to show strength, in areas such as autos and tourism; however, there is growing concern in retail over slowing growth affecting Holiday sales volumes. Inflation continued to look contained, with comments about higher import costs from tariffs being absorbed in margins for now as opposed to being passed along to consumers.

Market Notes

 

Period ending 10/18/2019	1 Week (%)	YTD (%)
DJIA	-0.13	16.99
S&P 500	0.55	21.05
Russell 2000	1.57	15.13
MSCI-EAFE	1.24	14.70
MSCI-EM	1.23	6.03
BBgBarc U.S. Aggregate	0.10	8.34

 

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
10/11/2019	1.68	1.63	1.59	1.76	2.22
10/18/2019	1.66	1.58	1.56	1.76	2.25

 

U.S. stocks were mixed overall last week, but ended with more gains than losses, as decent earnings served as a catalyst for better sentiment. Equities rallied early in the week with positive carryover sentiment from the announced but yet-to-be-confirmed early phase U.S.-China trade agreement. While it hasn’t been dubbed a full and complete ‘deal,’ it appears several minor concessions have been agreed to, such as removal/deferral of the October tariff round, as well as resumed Chinese agricultural product purchases (although amounts and timeline, if any, remain unclear). Markets could be jumping the gun with too much positivity, as the key substantive issues have yet to be addressed.

Aside from trade, several positive earnings reports in the financial and healthcare sectors added to optimism, by Goldman Sachs and JPMorgan in the former, and insurer UnitedHealth in the latter. Sector returns were in keeping with these results, as health care, financials and consumer discretionary stocks led with gains, while energy and technology ended up losing ground—the latter by a weak IBM report. Small caps remained in a quiet correction, down -10% from peak levels several months ago.

Foreign developed market stocks performed largely in line with U.S. stocks in local terms, but outperformed when adjusted for the impact of a sharply weaker U.S. dollar. Brexit progress, noted by a tentative UK-EU deal in light of the upcoming Halloween deadline, caused the pound to rally again. Now, will the deal be approved? If not, odds for another extension seem the best case scenario. Emerging nations fared similarly to developed nations, with strength in India offset by weakness in China. Chinese GDP growth for Q3 came in at 6.0%, below estimates calling for 6.2%—and the lowest rate of growth in 25 years. It appears the impact of tariffs is continuing to weigh on the Chinese economy despite stimulus efforts by the government. This is relative, though, with growth rates continuing to run several times that of the developed world, including the U.S. Naturally, slowing in China—one of world’s growth leaders—has led to downgrades of global growth by such entities as the International Monetary Fund.

U.S. bonds were little changed last week, with minimal changes across the yield curve. Investment-grade credit outperformed government debt, led by bank loans and high yield. With the U.S. dollar falling about a percent, foreign bonds gained sharply in USD-investor terms, in both developed and emerging markets.

Commodities were also little changed for the week on net, despite the weakness in the dollar, which is often a tailwind. Agricultural prices rose, natural gas prices spiked 5% due to expected heightened demand from colder weather across the U.S., while the price of crude oil fell by about -1.5% to around $54/barrel. Pricing continued in a trading range, with ample supply, yet fears about a global slowdown negatively affecting demand.

Mortgage Rates

“Despite this week’s uptick in mortgage rates, the housing market remains on the upswing with improvement in construction and home sales,” said Sam Khater, Freddie Mac’s Chief Economist. “While there has been a material weakness in manufacturing and consistent trade uncertainty, other economic trends like employment and homebuilder sentiment are encouraging.”

The 30-year fixed-rate mortgage averaged 3.69% with an average 0.6 point for the week ending October 17, 2019, up from last week when it averaged 3.57%. A year ago at this time, the 30-year FRM averaged 4.85%.

The 15-year fixed-rate mortgage averaged 3.15% with an average 0.5 point, up from last week when it averaged 3.05%. A year ago at this time, the 15-year FRM averaged 4.26%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.35% with an average 0.4 point, unchanged from last week. A year ago at this time, the 5-year ARM averaged 4.10%.

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.