Resnick Advisors Weekly Update – October 2, 2017
October 2, 2017
The value of the goods and services produced by the economy is measured by gross domestic product. In the second quarter, the GDP increased at a rate of 3.1% compared to an increase of 1.2% in the first quarter. The rise in the rate of economic growth in the second quarter is attributable to increasing personal consumption expenditures, business investment, exports, federal government spending, and private inventory investment. A measure of the income earned during the production of goods and services, the gross domestic income index increased 2.9% in the second quarter after climbing 2.7% in the first quarter. This report may be providing evidence that the economy is slowly but steadily gaining momentum heading into the third quarter.
August saw personal income (pre-tax), disposable personal income (after-tax), and consumer expenditures increase over July. Personal income increased $28.6 billion, or 0.2% disposable personal income gained $14.9 billion, or 0.1% and personal consumption expenditures increased $18.0 billion, or 0.1%. While each of these indicators increased, the gains are considered marginal at best and highlight what has been a weak stretch of upward inflation. Core personal consumption expenditures (excluding food and energy) is one of the inflation gauges relied upon by the Federal Reserve. Further evidencing weakness in price increases, the core PCE increased a scant 0.1% for the month and is up only 1.3% over the last 12 months.
Sales of single-family homes dropped 3.4% in August from July. The August sales rate is 1.2% below the August 2016 rate. New home sales prices fell in August. The median sales price of new houses sold in August 2017 was $300,200 ($319,900 in July). The average sales price was $368,100 ($371,300 in July). The estimate of new houses for sale at the end of August was 284,000. This represents a supply of 6.1 months at the current sales rate.
Manufacturers of durable goods saw a rebound in new orders and shipments in August following a slow July. New orders for durable goods increased $3.9 billion, or 1.7%, in August. Transportation equipment, up 2 of the last 3 months, led the increase, up $3.6 billion, or 4.9%. Shipments of machinery, which climbed 1.1% for the month, led a 0.3% increase in total shipments. Inventories of manufactured durable goods in August, up 13 of the last 14 months, increased $1.4 billion, or 0.3%. Again, machinery, up 9 of the last 10 months, led the increase, gaining 0.8%.
The international trade gap for goods narrowed in August. The international trade deficit was $62.9 billion in August, down $0.9 billion from $63.9 billion in July. Exports of goods for August were $128.9 billion, $0.3 billion more than July exports. Imports of goods for August were $191.8 billion, $0.6 billion less than July imports.
The Conference Board Consumer Confidence Index® and the University of Michigan’s Index of Consumer Sentiment each showed consumer confidence fell in September from August. The hurricanes, North Korea, Charlottesville, and the country’s growing divisiveness have affected consumers’ economic outlook.
In the week ended September 23, the advance figure for initial claims for unemployment insurance was 272,000, an increase of 12,000 from the previous week’s level, which was revised up 1,000. Hurricanes Harvey and Irma impacted initial claims. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended September 16 was 1,934,000, a decrease of 45,000 from the previous week’s revised level.
DJIA: 22,405.09, up 0.25%
Nasdaq: 6,495.96, up 1.07%
S&P 500: 2,519.36, up 0.68%
Russell 2000: 1,490.86, up 2.76%
Global Dow: 2,907.67, down 0.01%
Fed. Funds: 1.00%-1.25%, unchanged
10-year Treasuries: 2.33%, up 13 bps
The large-cap benchmarks closed modestly higher for the week, while the small-cap indexes scored more substantial gains. The advance brought most of the indexes to new intraday highs on Friday, but the narrowly focused Dow Jones Industrial Average remained a bit below the peak it established the previous week. The performance of the small-cap Russell 2000 Index was particularly notable, as it finally managed to surpass the intraday high it had reached in late July. On a sector basis, technology stocks were especially strong, helped by a rebound in Apple shares and strength in semiconductor stocks. Consumer staples and utilities shares lagged.
With the third-quarter earnings reporting season set to begin in a couple of weeks, investors appeared to remain focused on the political and economic environment. A further escalation in North Korean tensions over the weekend weighed on sentiment when trading opened Monday, according to traders. Stocks quickly regained their footing, however, helped in part by the unveiling of the Republican tax reform plan on Wednesday. Specifically, investors appeared to react positively to President Donald Trump’s description of plans to lower the top tax rate, eliminate the alternative minimum tax (AMT), and treat foreign corporate profits currently accumulated overseas as already repatriated. The announcement of the tax plan seemed to foster at least a temporary revival in the “reflation trade” of late 2016, which saw small-caps and value stocks lead the market higher. Indeed, the Russell 2000 Index recorded its best daily gain on Wednesday since the previous November.
While many details of the Trump administration tax plan remained undecided — and its ultimate passage far from certain — expectations that the plan would also add to the federal deficit and result in increased issuance of Treasury bonds helped push long-term yields higher. On Thursday, the yield on the 10-year Treasury note touched its highest level since July before decreasing a bit. (Bond prices and yields move in opposite directions.) Some solid economic data may have also contributed to the increase in long-term yields. Durable goods orders rose solidly in August, with a significant increase in core capital goods orders pointing to an increase in business confidence in investment. Municipal bond prices fell alongside those of Treasuries, with healthy investor demand unable to keep up with a significant new issue calendar, combined with lackluster activity in the secondary market.
Favorable technical conditions bolstered the performance of the investment-grade corporate bond market, according to analysts. Limited new issuance, active demand from investors in Asia following the move higher in U.S. rates, minimal dealer inventories, and inflows to the asset class contributed to the favorable backdrop, with month-end buying and the upcoming earnings blackout period providing a further tailwind. Credit spreads — the additional yield offered over Treasuries with comparable maturities — narrowed throughout the week, with riskier market segments seeing healthy demand.
The high yield primary calendar remained active during the week, with year-to-date new issuance having increased roughly 15% year-over-year. Elevated activity in the primary market meant that secondary volumes were muted, however. Toward the end of the week, energy sector bonds retraced earlier gains amid concerns that the recent rally in oil prices could be losing momentum — domestic (West Texas Intermediate) crude prices reached their highest level since April during the week, while international (Brent) prices reached levels not seen since mid-2015. Below investment-grade funds reported inflows for the week, and credit spreads compressed slightly.
The STOXX Europe 600 Index advanced about 1.1% for the week, with traders noting that the unveiling of the Trump administration’s tax plan helped spur gains in European markets. German stocks, as represented by the DAX index, were up about 1.6% for the week following the country’s election on September 24. Angela Merkel won a fourth term as German chancellor, but her centrist coalition lost ground while the nationalist AfD party became the first far-right party to enter parliament since the 1950s. Initial fallout from the election included the announcement that Finance Minister Wolfgang Schäuble, one of the leading advocates of further European integration as well as fiscal austerity, would be leaving his post. In Spain, stocks were volatile as the country prepared for a contentious referendum on independence for Catalonia.
Yields on most eurozone government bonds increased, tracking moves in U.S. Treasuries following the announcement of potential tax reform in the U.S. Ten-year German bunds briefly rallied early in the week following the German election. In economic news, Eurostat, the European Union’s statistical office, reported that prices rose 1.5% for the 12-month period ended in September — the same annual rate recorded in August. The inflation rate remains below the European Central Bank’s 2% target. In separate reports, eurozone economic sentiment rose more than expected in September, and UK retail sales surpassed forecasts and reached their highest levels in two years.
Japanese stocks posted modest gains for the week. The Nikkei 225 Stock Average advanced 60 points and closed at 20,356.28. For the year to date, the Nikkei is up 6.5%, the broad-based, large-cap TOPIX Index is ahead 10.3%, and the TOPIX Small Index has gained 19.5%. The yen weakened and closed near ¥112.5 per U.S. dollar, which is about 3.9% stronger than the ¥117 per dollar level at the end of 2016.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2017. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.