Your Weekly Update for Monday, October 28, 2019
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CERTIFIED FINANCIAL PLANNERTM
NATIONAL SOCIAL SECURITY ADVISOR
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
Markets were all up last week. The Dow Jones Industrial Average rose 0.70% to 26,958.06. The S&P500 ended up 1.22% to 3,022.55 while the Nasdaq Composite finished up 1.90% to 8,243.12. The annual yield on the 30-year Treasury rose 4.60 basis points to 2.292%.
Economic data for the week included weaker readings for durable goods and consumer sentiment. Housing data points were down for the month but mixed on a longer-term standpoint, while jobless claims fell, which was a positive.
Global equity markets generally gained on the week, with U.S. and foreign stocks performing largely in line. Fixed income returns were flat, as interest rates were again little changed from the prior week. Commodities gained due to sharp price increases for crude oil contracts.
(-) Durable goods orders in September fell by -1.1%, which slightly disappointed relative to the median forecast calling for a -0.7% decline, in addition to downward revisions for the previous month. Removing transportation orders cut the decline to -0.3%, due to civilian aircraft orders being down -12%. Core capital goods orders fell -0.5%, compared to expectations of little change, and core capital goods shipments also fell by -0.7%. On a year-over-year basis, the headline durable goods orders index is down over -5%, while removing transportation orders brought the rate of change to flat.
(-) The FHFA house price index rose 0.2% in August, which was a tenth below expectations. Home prices rose in two-thirds of the national regions, led by New England and upper Midwest states gaining over a half-percent, while the KY/TN/MS/AL region fell by nearly a percent. On a year-over-year basis, the index also continued to decelerate, by -0.5% from last month, to 4.6%, which is a low for the past several years (although a high level historically).
(-) Existing home sales for September fell by -2.2% to a seasonally-adjusted level of 5.38 mil. units, versus expectations of a lesser decline of -0.7%. Single-family sales fell by almost -3%, while condos/co-ops rose by just short of 2%. Regionally, sales fell everywhere, with the Midwest and Northeast leading with drops of -3%, while the West only fell by -1%. Existing sales are up 4% from a year ago, with the median sales price up 6% from a year ago to $272,100.
(-) New home sales in September fell by -0.7% to a seasonally-adjusted annualized rate of 701k units, which slightly disappointed relative to the 701k expected by consensus; this is in addition to several prior-month revisions. Regionally, sales rose in the Midwest, but declined in the other three regions, led by the West with the most significant declines. Months’ supply was stable at 5.5, as inventories declined by a few thousand units nationally. While sales activity is up 15% on a year-over-year basis, overall activity remains well-below long-term averages needed to sustain demographic growth. Interestingly, the prices for new homes have begun to roll over, with the median price falling -9% over the last 12 months to $299,400, and the average price down -6% to $362,700. Affordability could have been a factor, while lower interest rates should be helping on the mortgage financing side, although low inventories remain a challenge. In contrast to prior cycles, developers appear to be holding off on overbuilding until demand appears, which may serve to flatten supply/demand imbalances we’re used to.
(-) The final Univ. of Michigan consumer sentiment survey for October declined by -0.5 of a point from the prior month to a level of 95.5, below the unchanged 96 reading expected by consensus and down -2.8 from the early October preliminary report. Respondent assessments of present conditions declined just slightly, but were pulled down by an over-half-percent drop for future expectations. Inflation expectations for the coming year were flat at 2.5%, while those for the next 5-10 years ticked up by 0.1% to 2.3%. The latter is near an all-time low in terms of the survey’s inflation long-term inflation expectations measure.
(+) Initial jobless claims for the Oct. 19 ending week fell by -6k to 212k, which fell below the consensus forecast of 215k. Continuing claims for the Oct. 12 week ticked down by -1k to 1.682 mil., which still came in a bit above the 1.678 mil. claims expected. No anomalies were reported, with claims activity focused in a few manufacturing-oriented states, such as NY and MI. Overall, the low levels continue to point to a strong labor market with minimal layoffs.
Question of the Week: Do the recently-announced commission-free trade programs by a variety of brokers move the needle on using exchange-traded funds or individual stocks in portfolios?
From a broader investment perspective, every fee reduction should theoretically help reduce drag and improve net returns. However, this change doesn’t alter the investment landscape in a structural sense. For many investors who implement a prudent (non-excessive) level of activity, the difference between $5 and $0 is relatively small from the proportion of trade amount to account size. For smaller investors, it may increase the temptation to trade more often or buy more holdings through smaller trade sizes, but, in most cases, such investors are better served by a more holistic portfolio or balanced-type option regardless. This temptation to ‘over-trade’ based on the apparent cheapness of trade costs may can end up destroying more portfolio value than it could ever end up creating.
This does not include the fact that even commission-free trading doesn’t necessarily mean an immediate great deal. As with any security, the hidden cost of buying/selling stocks and ETFs is the presence of a bid/ask spread. While many investors assume a transaction takes place right at the current market price, pricing has always been tilted in favor of the broker and away from the investor. The ‘bid’ represents the lower of the two quotes the market (broker) will offer you for selling your shares, while the ‘ask’ is the higher of the two prices you are charged to purchase shares. The difference between the two is the ‘spread’—which is kept by the broker and for whom it becomes a source of income. This is the way transactions have been handled for centuries, except that these spreads have shrunk over time for more liquid assets with increased transparency and movement away from human to electronic trading. Spreads for less liquid assets, including penny stocks and the like, can remain very wide, and surprise the unsuspecting buyer.
The addition of zero-cost trading may add to transaction volumes (or not), but the increase in activity has been occurring anyway, with the gradual reduction in commissions beginning at the time of great deregulation away from fixed-rates in 1975. That rule change created the opportunity for the first discount brokers, such as Schwab, and began a gradual process of fee reductions. While many publicly-traded broker-dealers have seen their share prices negatively affected by the recent fee-lowering announcements (due to the implications of lower profits over time), such firms are resilient, and could well attempt to offset the removal of these fees with other activities. In fact, while brokerage commissions were a large revenue generator, they remain far smaller than interest spread earned on cash held in brokerage accounts as well as asset-based fees from investment products. Seeing the writing on the wall some time ago about shrinking commissions, many brokerages have moved further into the investment advisory business, which has tended to provide more consistent fee revenue than individual transactions.
We are in the process of developing a variety of materials on some of these topics, including the pros and cons of using ETFs in portfolios, as well as blending passive and active approaches based on past characteristics, which we would be happy to share upon request.
|Period ending 10/25/2019||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.15||8.17|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
U.S. stocks gained on the week, with corporate earnings reports coming in a bit better than expected and improved sentiment and rhetoric concerning a China trade deal. By sector, energy, tech and industrials ended with the strongest gains. Energy was helped by oil prices recovering and helping to stem long-standing negative sentiment in that sector, while industrial earnings were lackluster by Boeing and Caterpillar, but not as bad as expected. Consumer discretionary brought up the rear, with a percent decline for the week, led by a poorer-than-expected earnings report from online retailer Amazon.
Insofar as Q3 earnings details are concerned, 40% of companies in the S&P have now reported, with 80% of them beating estimates (per FactSet). However, overall growth for the year-over-year period remains negative, at -3.7%, which is slightly better than first expected, but under water nonetheless. The overall picture would look so dire, if it weren’t for the -40% decline in earnings for the energy sector, followed by -10% for materials. On the brighter side, the more defensive sectors of utilities, real estate and health care have been in the lead, with earnings in the positive mid-single digits.
Foreign stocks fared largely in line with U.S. stocks, helped by stronger sentiment toward an end to the U.S.-China trade stalemate. The U.K. fared surprisingly well, with support in parliament for the current withdrawal agreement, but time running out, with the upcoming Brexit deadline of Oct. 31 again likely to be extended several more months (despite possible blocks from members of the EU, particularly France, which would tighten the timeframe). The ECB decided to keep interest rates unchanged, which surprised some, in Mario Draghi’s last meeting as central bank chair. European earnings also started a bit stronger than expected, which helped sustain sentiment. Manufacturing PMIs in Europe and Japan remain in contractionary territory, but appear to be flattening or improving from trough levels, which could be helping sentiment. Due to the trade impact, emerging markets fared slightly better than developed, led by commodity producers Brazil and Russia, along with stronger energy prices. A smaller EM component, Chile, suffered sharply with escalating protests/riots following a proposed increase in bus and train fares, which morphed into deeper demands for a solution to social inequality.
U.S. bonds provided returns generally flat to slightly negative, as the only change in the yield curve was a steepening on the longer end. Risk-focused assets, such as high yield and floating rate bank loans outperformed, as expected. Foreign debt was mixed, with a stronger dollar holding back developed market sovereigns, while emerging market bonds fared positively—especially local debt.
Real estate was flat to slightly negative on net, underperforming broader equity markets, with declines in healthcare offset by stronger performance in retail/malls. European REITs underperformed other regions.
Commodities rose across the board, except for agriculture, despite the headwind of a stronger dollar. The price of crude oil rose by over 5% to a shade under $57/barrel, following reports of falling U.S. rig counts, which decreases supply, in addition to optimism over a trade deal and rumblings over possible extensions of OPEC output cuts.
“The outlook for a favorable resolution to the trade dispute between the U.S. and China is still unclear, introducing some volatility into financial markets and the benchmark 10-year Treasury yield,” said Sam Khater, Freddie Mac’s Chief Economist. “Mortgage rates are following suit but are at near historic lows, while mortgage applications to purchase a home remain higher year over year.”
The 30-year fixed-rate mortgage averaged 3.75% with an average 0.5 point for the week ending October 24, 2019, up from last week when it averaged 3.69%. A year ago at this time, the 30-year FRM averaged 4.86%.
The 15-year fixed-rate mortgage averaged 3.18% with an average 0.5 point, up from last week when it averaged 3.15%. A year ago at this time, the 15-year FRM averaged 4.29%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.4% with an average 0.3 point, up from last week when it averaged 3.35%. A year ago at this time, the 5-year ARM averaged 4.14%.
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.