Volatility Returns: The Markets’ Response to Change – Weekly Update for May 22, 2017

Early last week, both the S&P and NASDAQ recorded all time highs before tumbling along with the Dow as political concerns rose. By Friday, though, the markets had largely rebounded and steadied. The S&P 500 closed the week down 0.38%, the Dow saw a 0.44% loss, and the NASDAQ reported a 0.61% decline. The MSCI EAFE reported up 0.79% for the week.

The CBOE VIX is designed to measure market volatility by using S&P 500 put and call index option prices. For most of the year, volatility in the markets has been low. However, the CBOE Volatility Index (VIX) spiked 40% midweek before falling back by week’s end, indicating a possible increase in market volatility.

Through the week’s ups and downs, investors followed some other important economic developments.

LAST WEEK’S DEVELOPMENTS:

  • Solid Regional Business Index
    The Philadelphia Fed Business Outlook Survey again pointed to progress in the factory sector. While the consensus range was 16.0 – 25.0, the General Business Conditions Index-Level reported 38.8.
  • Mixed Housing Reports
    New home sales remained strong as the housing market index rose 2 points to 70. The data came out well ahead of the 65 – 69 consensus range. However, April housing starts were lower than expected. Housing starts are now at a 1.172 million annualized rate, after falling 2.6%.
  • Household Debt Rises
    Total household debt rose to a new high, reporting a $149 billion increase to come in at $12.73 trillion. Student loans and auto loans were major contributors to the rising debt:

WHAT’S AHEAD

Economy
Manufacturing output rose 1.0 percent in April, the strongest monthly result in over 3 years. As such, investors will track how the rest of the second quarter shakes out. In addition, we will be interested in this week’s housing reports, hoping for a better handle on where this up-and-down sector is heading.

Geopolitical
Financial markets could experience some headwinds as geopolitical situations fester. Concerns over North Korea and political opposition to globalization remain. In addition, Brazil is facing political disruption and a deep recession that could mean problems for companies with business interests in that country. Similarly, continuing political challenges for the Trump administration may adversely affect proposed tax reform, health-care legislation, and infrastructure initiatives.

As always, we will continue keeping abreast of market and economic updates. We encourage you to focus on your long-term financial outlook. Should you have any questions, we are happy to help.

ECONOMIC CALENDAR

Tuesday:  New Home Sales
Wednesday:  Existing Home Sales
Friday: Durable Goods Orders, Consumer Sentiment

Markets Ignore The Politics – Weekly Update for May 15, 2017

Markets tuned out noise from Washington last week and continued to focus on economic fundamentals. Mildly rebounding retail sales and strong consumer sentiment seem to point toward a modestly stronger second quarter.

After a three-week winning streak, both the Dow and S&P 500 reported slight losses. The Dow closed with a 0.53% loss, and the S&P 500 reported a 0.35% decline for the week. The NASDAQ, however, rose 0.34% while the MSCI EAFE reported a modest 0.16% gain.

MIXED SIGNALS CONTINUE

  • Soft retail earnings

Consumer retail purchases were up after a first-quarter decline. Sales rose by 0.4% (just shy of the 0.6% consensus), and 9 of the 13 retail categories posted gains.  As expected, early second-quarter gains suggest the first-quarter decline was just a blip.

  • Continuing concerns over store closings

A report last month concluded that in excess of 8,600 brick-and-mortar stores could close in 2017 due to poor sales. Last year, at least 2,000 stores shut their doors, while just over 5,000 closed in 2015. The record for store closings occurred in 2008 when over 6,000 stores closed.

  • Strong consumer sentiment

Despite modest retail sales, consumer confidence reached a 4-month high. Consumer expectations are positive regarding job growth, income, and low inflation. Furthermore, 44% of surveyed consumers expressed optimism in their financial prospects—the highest percentage since 2004.

  • S. consumer prices rise in line with expectations

The consumer price index rose 0.2% in April, in line with expectations for the month. However, the medical care and communications sectors saw continuing price weakness.

LOOKING AHEAD

This week, we will look forward to data regarding the strength of the housing market. Though the highest percent of consumers in over 10 years report positive opinions on selling homes, next week’s numbers will give us a better idea of where the markets stand. Finally, the market will continue to watch oil prices, which steadied this week after three weeks of decline.

In the weeks ahead, possible corporate tax rate reductions and potential trade policy changes will remain in focus for markets. In addition, markets will remain interested in the Fed’s interest rate plans and its plan to reduce its $4.5 trillion balance sheet.

As always, we will continue to track the impact of international and domestic political news on the markets and the economy.

ECONOMIC CALENDAR

Monday: Housing Market Index
Tuesday: Housing Starts, Industrial Production
Wednesday: EIA Petroleum Status Report
Friday: Philadelphia Fed Business Outlook Survey

May 2017 Market Update Video

In this month’s video, Josh will talk about some of the major headlines that influenced markets in April and about a few first-quarter reports. We hope this information offers insight into what these developments might mean for you as an investor.

If you have any questions or concerns, or would like another opinion on your portfolio after watching this video, please don’t hesitate to send us an email, or give us a call at (419) 425-2400. We would be happy to talk with you.

Mixed Signals, Positive Performance – Weekly Update for May 8, 2017

Last week, stocks rose but floated within a narrow trading range. By Friday, however, both the S&P 500 and the NASDAQ reached record highs. For the week, the S&P 500 gained 0.63%, the Dow finished up 0.32%, and the NASDAQ rose 0.88%. The MSCI EAFE added 1.7%.

Overall, we experienced another week of generally positive, but somewhat mixed, economic signals. Soft auto sales and tumbling oil prices offset increased job creation and the lowest unemployment recorded in a decade.

POSITIVE MARKET NEWS

  • Increased Job Creation and Low Unemployment
    In April, U.S. payrolls added 211,000 jobs, exceeding the 190,000 predicted and showing a significant bounce back from March’s 79,000 increase. The jobless rate also dropped to 4.4%—the lowest it has been since May 2007. The economy added jobs in several industries:

    • Leisure and hospitality: +55,000 jobs
    • Health care: +20,000 jobs
    • Mining: +9,000 jobs
    • Professional and business services: +39,000 jobs
    • Government: +17,000 jobs
  • Strong Corporate Earnings
    First quarter earnings season continued last week, and U.S. companies once again reported strong results. So far, companies with majority overseas profits are reporting an average revenue growth of 19.9%, outperforming S&P 500 companies with domestic earnings only. This difference helps explain how corporations are reporting strong Q1 earnings despite sluggish economic growth in the U.S. during the same period.

MIXED SIGNALS

  • Auto Sales Below Expectations
    U.S. motor vehicle sales bounced up to an annualized rate of 16.9 million. Though April’s report falls below the predicted 17.2 million, it improves on March’s 16.6 million annualized rate.
  • Oil Prices Tumble
    Oil prices tumbled last week. Both June West Texas Intermediate (WTI) crude and July Brent crude finished the week down. WTI closed at $46.22 a barrel, falling approximately 6.3% below last week’s close. Brent crude fell by about 5.6% for the week to $49.10 a barrel.

LOOKING AHEAD

On Wednesday, May 3, the Federal Open Market Committee (FOMC) announced it would keep the federal funds target range at 0.75% to 1.00%. Nonetheless, the Fed remains encouraged that the second-quarter GDP will rebound, because they believe consumer fundamentals remain solid. This sentiment may indicate the FOMC will raise rates in their June meeting.
On Sunday, Emmanuel Macron won the French presidential election, as expected. Macron’s win should ease European Market concerns, as he is a centrist who supports global trade, the euro, and France’s continuing membership in the EU.

As we look ahead to this week, our analysis will include a variety of international and domestic focuses. In particular, consumer prices, retail sales, and business inventories will highlight economic reports for the week while oil prices also should remain in focus for investors.

ECONOMIC CALENDAR

Tuesday: JOLTS (tracks monthly changes in job openings)
Thursday: Jobless Report, Producer Price Index
Friday: Consumer Price Index, Retail Sales, Business Inventories, Consumer Sentiment

Earnings, Taxes & International News: What’s the Market Impact? – Weekly Update for May 1, 2017

Stocks continued their advance on generally strong earnings reports this week despite the GDP report showing a slow first quarter economy. The S&P 500 rose 1.51%, the Dow gained 1.91%, and the NASDAQ added 2.32%. On Tuesday, the NASDAQ posted record highs as it closed over 6,000 for the first time. Internationally, the MSCI EAFE was up 2.97%.

On Friday, April 28, we learned that first quarter GDP increased a modest 0.7%, lower than the reported consensus expectations of approximately 1%. Oil drilling and housing performed well, but consumer spending fell, largely due to poor auto sales and lower utility bills. Consumer spending, the largest segment of our economy, rose by only 0.3%.

While this growth is slower than the 2.1% last quarter—and the lowest we’ve experienced in three years—the picture is likely not as negative as it may seem at first. Not only did mild weather affect consumer spending on heating, but the government has also acknowledged its challenges accurately calculating data for first quarter GDP.

In addition to these GDP readings, a number of other events and data releases contributed to market performance this week.

Domestic Developments

  • Corporate Earnings Were Largely Positive
    Thus far in the first quarter, 79% of reporting companies published strong profits. In particular, consumer discretionary companies and commodity producers reported robust earnings while phone services and real estate investment trusts had weaker results.

  • Trump Announced Tax Plan
    President Trump outlined his new tax proposal, including plans to cut corporate taxes to 15%. Individual tax rates would fall to 10%, 25%, and 35% if Congress adopts the President’s plan.

International News

  • North American Trade Experienced Tension
    On Wednesday, April 26, reports that the U.S. may pull out of NAFTA created concern in financial markets. By Thursday, however, markets calmed after President Trump said he would agree to requests from Canada and Mexico’s leaders to renegotiate the decades-long trade deal. As these negotiations continue, two controversies lay in the background:

    • U.S. dairy farmers’ claims that Canadian action concerning milk imports violates the trade agreement.
    • A new tariff of up to 24% on Canadian softwood lumber that President Trump announced last week.

Finding the right solution for the negotiations is important to the U.S., Canada, and Mexico. NAFTA affects a significant portion of each country’s economy, including industries such as farming, automotive, and energy. Trade with the two countries accounted for approximately $584 billion in U.S. exports in 2016.

What’s Next

With Congress avoiding a shutdown last week, the markets should focus this week on:

  • Earnings reports
  • Construction spending
  • April auto sales
  • Manufacturing data
  • Federal Reserve meeting on Wednesday

By Friday, most remaining S&P 500 companies’ earnings reports will be in, including Apple, Facebook, and Pfizer. Looking ahead, we will watch for what economic stories emerge from the data we receive, including the upcoming jobs report. For now, despite the first quarter’s initially slow GDP growth of 0.7%, expectations continue for 2.5% growth in 2017.

ECONOMIC CALENDAR:

Monday: Construction Spending, Personal Income and Outlays, PMI Manufacturing Index, ISM Manufacturing Index
Wednesday: ADP Employment Report, PMI Service Index, ISM Non-Manufacturing Index
Thursday: International Trade, Productivity and Costs
Friday: Employment Situation

 

Stocks Up on French Election Uncertainty – Weekly Update for April 24, 2017

Domestic stocks posted losses on Friday, April 21, largely due to investor concerns about the French election. Despite these daily losses, U.S. indexes broke their two-week losing streak, with the S&P 500 adding 0.85%, the Dow gaining 0.46%, and the NASDAQ increasing 1.82%. International stocks in the MSCI EAFE grew by 0.18%.

What Did We Learn Last Week? 

  • The French Election Is Concerning Investors

Uncertainty surrounding France’s presidential election contributed to investor caution last week. After Sunday’s ballot, National Front candidate Marine Le Pen will advance to the second round of voting on May 7, which decides the new president. Le Pen has promised to remove France from the European Union if she wins, a choice that could affect markets and currencies.

  • Quarterly Earnings Reports Are Mostly Strong

By Friday morning, 95 companies in the S&P 500 had reported their quarterly earnings; 77% of them beat earnings-per-share estimates.

  • Existing Home Sales Jumped 4.4% in March

Sales of existing homes hit levels not seen since 2007, and median home prices are up 6.8% over a year ago. Supply levels remain tight, and demand is high, as 48% of homes sold last month were on the market for less than a month.

  • Housing Starts Declined 6.8% in March

While the headline number for housing starts may seem pretty disappointing, it largely reflects the results of a return to typical March weather after unseasonably mild weather boosted starts in January and February. Overall, housing starts are up 9.2% over this time last year.

  • The Consumer Price Index Missed Expectations

Declines in gas and other energy prices contributed to the U.S. Consumer Price Index (CPI) falling 0.3% in March—its first monthly decline in more than a year.

  • Tax-Plan Information May Be on the Horizon

On April 20, Treasury Secretary Steve Mnuchin indicated that tax reform remains important. The next day, President Trump said a tax plan should be coming this week.

  • Oil Prices Dropped

Crude oil prices fell below $50 a barrel after losing 2.15% on Friday. Investors are showing concern about whether output decreases by OPEC can balance out against increasing U.S. production and prevent oversupply.

What’s Ahead

Moving into the last week of April, we will learn both first quarter GDP readings and gain further insight into consumer confidence and housing performance. On Friday, April 28, initial readings for first quarter GDP will help deepen our understanding of where the economy stands right now. Consensus estimates are at a soft 1.1% growth, even lower than last quarter’s 2.1% increase. After seeing this week’s low CPI numbers, combined with retail and inventory data, Barclays decreased its GDP estimate to only 0.8%.

Last week provided a variety of data and perspectives that are continuing to reveal themselves. As momentum from the French presidential outcomes and our own economic growth unfolds, we will watch these developments closely. Meanwhile, we encourage you to continue a long-term focus on your goals, and we are here to discuss any questions you may have along the way.

ECONOMIC CALENDAR

Tuesday: S&P CoreLogic Case-Shiller HPI, New Home Sales, Consumer Confidence
Wednesday: EIA Petroleum Status Report
Thursday: Durable Goods Orders, International Trade in Goods, Pending Home Sales Index
Friday: GDP, Employment Cost Index, Consumer Sentiment

First Glance: What Does Our Economy Look Like This Year? – Weekly Update for April 17, 2017

Last week, major indexes experienced losses for the second week in a row, with the S&P 500 falling 1.21%, the Dow giving back 1.01%, the NASDAQ dropping 1.26%, and the MSCI EAFE declining 0.14%.

Markets closed on April 14 for the Good Friday holiday, but in the four trading days, a number of headlines dominated the news cycles:

  • International tensions surrounding Syria and North Korea continued to heighten.
  • The U.S. dropped its biggest non-nuclear bomb in Afghanistan.
  • United Airlines lost $250 million in market value on Tuesday after footage emerged of a passenger’s violent removal from an overbooked flight.

These headlines drew great attention last week, and we will continue to follow events as they develop. Meanwhile, we want to focus on newly released data from last week that gives perspectives on where the economy is today—and what we should watch for in the coming months. In a nutshell, the reports hinted at relatively slow growth in the first quarter of 2017.

Inflation and Spending Dropped

  • The producer price index, which measures price changes for producers of goods and services, missed expectations and fell 0.1% in March.
  • The consumer price index, which measures price changes in a group of goods and services consumers purchase, fell 0.3%—much more than predicted.
  • Retail sales declined 0.2% in March, the second monthly drop in a row.

Consumer Sentiment and Jobless Claims Were Positive

  • The April Consumer Sentiment Index readings beat expectations, revealing people’s assessment of current economic conditions being near the all-time high.
  • Jobless claims came in well below expectations to show fewer people filing first-time unemployment claims—indicating a strong labor market.

Analyzed together, this new data could indicate that the Federal Reserve will be less likely to raise rates in June. However, we still have two more months of data and market performance until that meeting, and much can change in that time. Consumer spending accounts for approximately 70% of the total economy. Thus, high consumer sentiment and a tightening labor market—coupled with delayed income-tax returns—could help the economy pick up in the coming months.

Right now, we are in the thick of quarterly earnings season. Last Thursday, we saw J.P. Morgan Chase and Citigroup exceed their earnings estimates and still lose value in their shares that day. Determining whether this investor response is industry specific or indicative of other sentiment changes will be a key detail to examine in the coming weeks. The forthcoming reports will give key insights into the health of corporate America—and the market’s reaction to the companies’ performance.

We will continue to watch political and market developments and how they affect our overall economy. In the meantime, we encourage you to keep a focus on your long-term goals and the strategies that can help support your financial life.

ECONOMIC CALENDAR

Monday: Housing Market Index
Tuesday: Housing Starts, Industrial Production
Wednesday: Beige Book
Friday: Existing Home Sales

April 2017 Market Update Video

In this month’s video, I will discuss some of the major headlines that influenced markets over the past month. In addition, I share three signs of the tremendous economic progress the US has made over the past 8 years  — and provide insight into what these developments could mean for you as an investor.

If you have any questions about your portfolio after viewing this video, please give us a call at 419-425-2400, or send us an email. We would love to talk with you.

Special Quarterly Update: Stocks Post Strong Gains In Q1

The first quarter of 2017 is now behind us, and although we won’t have complete economic data for a while, we do know that domestic stocks had a solid start to the year. Last week, major indexes took a pause from some recent gains and began the second quarter of 2017 with less than thrilling performance. The S&P 500 lost 0.30%, the Dow was down 0.03%, the NASDAQ gave back 0.57%, and the MSCI EAFE declined 0.72%. For this week’s update, we’re going to examine what happened to markets in the first quarter.

How did markets perform in Q1?

All three major domestic indexes posted sizable gains in the first three months of 2017:

  • S&P 500 up 5.5%
  • Dow up 4.6%
  • NASDAQ up 9.8%

As we mentioned last week, the NASDAQ’s nearly double-digit growth represented its best quarter since 2013.

However, the majority of the markets’ gains happened in January and February. While the NASDAQ increased 1.48% in March, the S&P 500 stayed flat and the Dow lost 0.72% in the same period.

Which stocks outperformed in Q1?

Large cap stocks—companies with more than $5 billion in market capitalization—drove much of the growth we saw last quarter. Tech stocks performed especially well, gaining more than 12% over the quarter. In fact, S&P Info Tech, which tracks information technology stocks in the S&P 500, was the quarter’s highest performing sector index.

How did politics affect market performance in Q1?

As the new presidential administration came to power last quarter, investors closely followed policy news and headlines. We encourage you to pay more attention to economic fundamentals than media reports, but we understand that completely ignoring political conversations would have been challenging in Q1.

Overall, investor expectations for the new administration’s pro-growth policies helped push the markets to numerous record highs last quarter. However, when Congress chose not to vote on the American Health Care Act, market concerns increased about whether new policy changes would actually occur. The Dow lost 317 points the week of the expected—but cancelled—healthcare vote.

How high was volatility in Q1?

Even though policy debates have seemed to heighten the emotional landscape this year, the VIX measure of volatility recorded its lowest Q1 average ever. The 11.69 level is also the second lowest quarterly average since 1990.

What might be on the horizon?

Earnings season is upon us, and investors will be watching to see whether reports match expectations. According to FactSet, the S&P 500’s estimated earnings growth rate for Q1 2017 is 8.9%—which would be its best year-over-year earnings growth since 2013. Only a handful of S&P 500 companies have reported their earnings so far; of these reports, 57% exceeded the mean sales estimate and 74% exceeded the mean earnings-per-share estimate.

In addition to earnings, the Federal Reserve’s interest-rate decisions will be on many people’s minds throughout 2017. After raising rates on March 15, the Fed expects at least two more increases this year. So far, the markets absorbed these increases well, with the Dow even gaining 100 points on the Fed’s last meeting day.

Ultimately, we have many data points, policy updates, and economic indicators to focus on in the coming months. As of now, 2017 has started with strong market performance, high consumer confidence, and low volatility.

ECONOMIC CALENDAR

Tuesday: JOLTS
Wednesday: Import and Export Prices, EIA Petroleum Status Report
Thursday: PPI-FD, Consumer Sentiment
Friday: Consumer Price Index, Retail Sales, Business Inventories

Q1’s Initial Data & Records: What’s Next? – Weekly Update for April 3, 2017

With the first quarter of 2017 now behind us, we have seen the three major indexes all gain more than 4.5% so far this year. In fact, the NASDAQ just experienced its best quarter since 2013 due to tech stocks driving growth.

Despite closing down on Friday, the indexes added to their quarterly gains last week.  The S&P 500 grew by 0.80%, the Dow was up 0.32%, and the NASDAQ gained 1.42%. At the same time, international stocks in the MSCI EAFE lost 0.26% for the week.

What else happened last week?

  • Oil gained on word from OPEC

Oil prices experienced their largest weekly gains in 2017, ending above $50 a barrel. This growth is largely a result of speculation that OPEC (an intergovernmental organization of 13 oil-producing countries) will continue its agreement to curb oil output. By reducing supply, the nations aim to reduce the supply glut that drives prices down.

  • Q4 GDP increased with revisions

The final revisions for fourth quarter GDP beat expectations, coming in at 2.1%—up from the previous estimates of 1.9% growth. This plodding growth is in keeping with the economic recovery we have experienced the past several years.

  • Inflation hit a key Fed benchmark

When deciding on monetary policy, the Federal Reserve pays close attention to the PCE deflator, an inflation measurement from the Bureau of Labor Statistics. They want to see this data above 2%. We learned last week that in February the PCE deflator hit this level for the first time since 2012. If this trend continues, we could see additional interest rate increases this year.

  • Consumer confidence and sentiment remained high

The Conference Board’s March readings for consumer confidence jumped to the highest levels since December 2000, surprising economists who expected the reading to decline from February. The University of Michigan’s consumer sentiment readings also showed an increase for March. However, the Michigan survey’s chief economist pointed out that participants’ sentiment showed a deep partisan divide. With confidence and uncertainty seemingly split along party lines, the effect on spending behaviors remains to be seen.

So far, the first quarter of 2017 has brought market growth and several positive economic data reports—coupled with heated policy debates occurring in government and the media. Moving forward, we will continue to seek the best opportunities to pursue your goals and keep you informed with the information you need to help make solid decisions.

ECONOMIC CALENDAR

Monday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending
Tuesday: Motor Vehicle Sales, Factory Orders
Wednesday: ISM Non-Manufacturing Index
Friday: Employment Situation