A Volatile Market Waiting for Answers – Weekly Update for September 19, 2016

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Volatility picked up last week due to pressures from lower oil prices and speculation about the timing of the Federal Reserve’s next rate hike. This summer has been historically calm for markets, leading markets to trade without big intraday gains or losses. However, Friday broke that streak, possibly ushering in a period of greater volatility as uncertainty looms. For the week, the S&P 500 gained 0.53%, the Dow grew 0.21%, the NASDAQ added 2.31%, but the MSCI EAFE dropped 2.49%.

With mixed information and an uncertain political landscape, the market is facing a dilemma. On the one hand, economic data is neither weak nor strong enough to make policymakers’ choice easy on whether they should raise interest rates. On the other hand, the unpredictable nature of the presidential race contributes to market volatility. We’ve discussed throughout the race that it is not the result of the election that cause volatility, but rather the uncertainty leading up to the ultimate vote. All in all, Fed economists have repeatedly stated their intentions to raise rates soon, though no one is certain about the timing of this hike.

The Federal Reserve’s Open Market Committee will meet this week to decide whether or not to raise interest rates for the first time since December 2015. The Fed has a dual mandate: to maximize employment and keep inflation stable. Headline unemployment is below the Fed’s target of 5.0%, but inflation has remained stubbornly below the Fed’s long-run goal of 2.0%.

Fresh inflation data suggests a warmer trend. Two measures of inflation, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) deflator, rose in recent months, indicating that the economy is getting closer to the Fed’s target. While the increase in inflation might give pro-hike Fed economists ammunition at this week’s meeting, many analysts still don’t think the Fed will immediately raise rates.

Markets have been pushing new highs recently, and it wouldn’t surprise us to see a return to a volatile pattern in the days and weeks ahead. Uncertainty around economic growth, the November elections, Federal Reserve activity, and a future British exit from the EU could cause investors to become more cautious in the weeks ahead. We’ll be closely monitoring the overall market climate and will be in touch if we feel any prudent changes to investment strategies are necessary.

As always, we want to be sure to focus on long-term investing especially when there are brief ups and downs in the market. Please reach out to us by leaving a comment, emailing (hello@hzcapital.com) or giving us a call at 419-425-2400 if you have any questions about your portfolio. We’d love to connect with you and chat about how current events impact the market as a whole. Thanks for reading!

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, Fed Chair Press Conference

Thursday: Jobless Claims, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Consumer sentiment steady in September. A measure of how Americans feel about the economy and their financial prospects remained unchanged between August and September, suggesting households remain upbeat heading into fall.

Retail sales fall unexpectedly. U.S. retail sales fell more than expected in August on weak sales of autos.

Industrial production falls in August. Production in U.S. factories fell 0.4% last month amid a drop in demand for appliances, electronics, and machinery. Cooling demand for big-ticket items could spell trouble this quarter.

Weekly jobless claims rise less than expected. The number of Americans filing new claims for unemployment benefits rose last week, but increased less than economists expected.

Interest Rate Debate: The Fed’s Decision is Nearing – Weekly Update for September 12, 2016

blog-post-2016-09-12Monetary policy was at the forefront of investors’ minds last week as we all continue to calculate the odds of an interest rate increase at this month’s Federal Reserve’s Open Market Committee (FOMC) meeting. After trading flat for most of the week, stocks sank Friday on fears of the future rate hike. For the week, the S&P 500 lost 2.39%, the Dow fell 2.20%, the NASDAQ dropped 2.36%, and the MSCI EAFE lost 0.16%.

The European Central Bank (ECB) declined to increase its stimulus program, voting to stand pat on interest rates and current bond-buying activity. The decision wasn’t a total surprise as the Eurozone economy has proved resilient after Britain voted to exit the EU. However, the ECB did confirm that it will consider further quantitative easing in 2017 if conditions worsen. No exit date for Britain has been announced, though the new prime minister has indicated it will not begin before next year.

On our side of the Atlantic, surprise comments by a voting member of the Fed increased speculation that a rate hike may come this month. When markets are quiet, even rumors can be enough to spark a selloff. In previous weeks, Fed officials have ramped up hawkish rhetoric, suggesting sentiment that the Fed is moving toward a rate hike. Even reliably dovish officials, who have historically maintained a cautious stance, are showing interest in raising rates again.

We have now entered the quiet period before the FOMC meets September 20th, meaning we won’t get more statements from Fed officials before they vote on monetary policy. The information blackout will give investors plenty of spare time to digest previous statements and come to grips with the idea that the Fed is serious about raising rates this year.

All the speculation around the Fed’s increasing assertiveness about rates had a palpable effect on markets, which may be what the Fed wants to achieve. The chart below shows Wall Street trading probabilities of higher interest rates in coming months.

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On Thursday, traders put the odds of a September hike at just 18.0%. By the close of trading on Friday, the odds had surged to 24.0%. The odds of a December hike had been about even; now, traders seem to believe the Fed will raise rates again this year.

Is last week’s pullback a minor blip? We can’t know for certain, but investors should prepare for a bumpy ride this fall.

The week ahead is packed with economic data, including critical reports on business inventories. Positive data could contrarily cause further selling if investors believe it could spur the Fed to act. Negative data might likewise be greeted with cheers. As we move to a Fed vote and uncertainty around the November election peaks, markets are likely to remain volatile and perhaps even move into a more prolonged selloff. Ultimately, we want to focus on investing for the long term, and encourage you to tune out the media “noise” as volatility occurs. We’ll be sure to keep you updated on the latest.

ECONOMIC CALENDAR:

Tuesday: Treasury Budget

Wednesday: Import and Export Prices, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD, Retail Sales, Philadelphia Fed Business Outlook Survey, Empire State Manufacturing Survey, Industrial Production, Business Inventories

Friday: Consumer Price Index, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Fed Beige Book shows wage gains restricted to skilled workers. A key report released by the Federal Reserve showed that the economy grew modestly in July and August. However, data shows that most wage gains occurred only in skilled jobs where employers are struggling to find qualified workers.

Weekly jobless claims drop. The number of Americans filing new claims for unemployment benefits fell unexpectedly last week, marking the 79th straight week that claims remained below the key 300,000 level associated with a healthy labor market.

Monthly job openings increased in July. The number of available jobs, a data point closely watched by Federal Reserve economists, increased by 3.9% In addition, the hiring rate rose by 3.6%, pointing to a strong labor market.

Gas prices slide after summer. The summer driving season is over and falling gas prices might slip further this winter. Americans enjoyed the cheapest summer gas since 2004, and economists hope the “gas dividend” will boost spending this quarter.

Interest Rate Uncertainty after August Jobs Report – Weekly Update for September 6, 2016

blog-09-06-16After losing steam the previous week, stocks rose last week as investors cheered a weak jobs report and the declining probability of a September interest rate increase by the Federal Reserve. For the week, the S&P 500 gained 0.50%, the Dow grew 0.52%, the NASDAQ added 0.59%, and the MSCI EAFE grew 0.44%.

The August job report showed that the economy gained 151,000 new jobs instead of the 180,000 jobs predicted by economists. Since investors are keenly watching the odds of a rate hike ahead of the mid-September Federal Open Market Committee meeting, they treated the jobs miss as a win since it might reduce the chance of a rate hike this month.

However, investors might be cheering too early since there’s still the possibility the Fed might act. The August employment report is notoriously unreliable due to the effects of seasonal labor, which often peaks in the summer. Since 2011, August job gains have undershot estimates by about 49,000 and have been revised upward by an average of 71,000 jobs over the following months.

If enough Fed economists see the August numbers as a seasonal aberration, they may use June/July numbers to determine that the economy is strong enough to weather another rate hike. However, despite Fed Chair Janet Yellen’s hawkish tone, some experts don’t believe the Fed will act until December at the earliest.

There is also the November election to consider; historically, the Fed tends to choose the more cautious path when facing a close call. One expert pegs the odds of a September hike at 55% and a December hike at 80%. Overall, Wall Street traders are less confident of a September hike, assigning just a one-in-four chance of a rate increase.

Digging deeper into the August numbers, we see that the headline unemployment rate remained at 4.9%, and a broader measure of unemployment, which also includes discouraged and underemployed workers, also remained unchanged at 9.7%. Wage growth also slowed; hourly wages rose just three cents, increasing just 2.4% over the previous 12 months.

Though overall wage gains are slow, different sectors show different stories. Employees in high-demand tech jobs saw their wages go up 4.3% over a year go. Even restaurant and hotel employees are experiencing year-over-year wage gains of 3.9%.

Our View

All told, the August jobs report paints a mixed picture of the economy. New jobs are still being created at a respectable clip and represent a strong tailwind in the third quarter. However, the pace of jobs growth may be waning, which is a concern. Furthermore, the pace of wage growth is also slow and may represent a divide between the workers who are fully experiencing the benefits of an economy close to full employment, and those who are being left behind.

As attention focuses on the Fed’s September meeting, we expect to see further volatility. However, the fact that the Fed is seriously contemplating a rate hike this fall suggests policymakers believe in the underlying strength of the economy. That’s great news.

ECONOMIC CALENDAR:

Monday: U.S. markets closed for Labor Day Holiday

Tuesday: ISM Non-Manufacturing Index

Wednesday: JOLTS, Beige Book

Thursday: Jobless Claims, EIA Petroleum Status Report

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HEADLINES:

Consumer confidence surges. A measure of how confident Americans feel about the economy rose to its highest level in nearly a year, suggesting that consumer spending may support growth this quarter.

Auto sales remain brisk. Sales of U.S. cars and trucks were still healthy in August, but lagging activity at Ford and GM made analysts worry that total volume is declining from its blistering 2015 pace.

Factory orders up in July. Orders to U.S. manufacturers rose to the highest level in nine months in July. However, much of the increase was due to volatile orders for aircraft, indicating the surge may be temporary.

Mortgage applications up 2.8%. Overall mortgage applications were up last week as interest rates remained stable. However, refinancing activity should be higher given rates near record lows.

Stocks Going Strong – Weekly Update for August 22, 2016

What is the Fed thinking now-Last week, the NASDAQ posted an eighth straight week of gains for the first time since 2010. Though late last week we saw minor losses in the other major indices, the market has held on strong since its post-Brexit boom. For the week, the S&P 500 lost 0.01%, the Dow fell 0.13%, the NASDAQ gained 0.10%, and the MSCI EAFE lost 0.64%.

With the market’s stellar performance as of late, we can’t help but ask, what is the Fed thinking? Minutes from the July Federal Reserve Open Market Committee meeting showed that officials are split about the economic outlook and when to raise interest rates. Hawkish rhetoric from Fed members who favor a rate hike soon could push the central bank into raising rates as early as September. More dovish officials aren’t convinced that tepid inflation will rise to the Fed’s 2.0% objective and favor a wait-and-see approach to raising interest rates.

After several months of strong labor market gains, some economists think the economy is close to full employment and central bankers should move soon to put on the brakes by raising interest rates. If the economy gets overheated, prices could rise too much and push the economy into a boom/bust cycle that federal officials are anxious to avoid.

While a few years of outsized growth sounds nice after the years of slow expansion we’ve experienced, the economic consequences that might follow wouldn’t be pleasant at all. That’s why central banks like the Fed act to smooth out these economic cycles by lowering interest rates when times are tough (boosting investment through cheap credit) and raising them when growth picks up again (curbing excessive optimism by making credit more expensive).

The timing of rate increases is tricky, and the macroeconomic relationships that govern these decisions are complex and open to interpretation. This explains why some of the best economists in the world can’t agree on when to pull the trigger.

Which group will win out? Since the Fed has been reluctant to jump the gun on interest rates, we don’t see a rate hike coming next month. However, the Fed might decide to surprise us.

Currently, Wall Street traders judge the odds of a September hike at just 18.0%. However, traders think the Fed is likely to raise interest rates in 2016, judging by December’s rate probabilities. Will the Fed move soon? We’ll keep you informed.

Stocks Going Strong - Weekly Update for August 22, 2016

This week is packed with economic data that will show us how the housing and manufacturing sectors are doing. We’ll also get a second look at second-quarter economic growth in Friday’s Gross Domestic Product report. Stay tuned for next week’s update.

ECONOMIC CALENDAR:

Tuesday: New Home Sales

Wednesday: PMI Manufacturing Index Flash, Existing Home Sales, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims

Friday: GDP, International Trade in Goods, Corporate Profits, PMI Services Flash, Consumer Sentiment

Stocks Going Strong - Weekly Update for August 22, 2016

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


HEADLINES:

Inflation remains flat.
Consumer prices remained unchanged in July as gasoline prices fell for the first time in months. Modest inflation may reduce the chances of future interest rate increases by the Fed.

Housing starts surge to five-month high. Groundbreaking on new residential projects rose in July, potentially boosting second-quarter economic growth numbers.

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits dropped last week, suggesting the labor market continues to strengthen and approach full employment.

Industrial production rises more than expected. A measure of industrial sector production (including hard industries like mining, manufacturing, and utilities) increased by 0.7% versus the 0.3% rise expected.

Earnings Drive Record High Close – Weekly Update for August 15, 2016

Earnings Drive Record High Close - Weekly Update for August 15, 2016

Stocks rallied late last week as the S&P 500, Dow, and NASDAQ all closed at record highs on Thursday for the first time since New Year’s Eve 1999. The NASDAQ also notched a seventh week of gains, its longest winning streak since 2012. For the week, the S&P 500 gained 0.05%, the Dow grew 0.18%, the NASDAQ added 0.23%, and the MSCI EAFE grew 2.73%.

Earnings season is mostly behind us, and, with nearly all of the S&P 500 companies having reported in, we have a good overall picture of last quarter’s performance. Total earnings for the index so far were down 3.7% on -0.7% lower revenues relative to Q2 2015. However, 71.1% have managed to beat profit expectations, which has given stocks a boost in recent weeks.

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Here’s what we can take away from the second quarter:

Though earnings growth is still negative, it’s a vast improvement over what we saw in the first quarter from the same group of companies. Results are also better than the 4-quarter moving average. Revenue growth is also negative, showing that many companies are still (seven-plus years into the economic recovery) struggling with slow demand.

The energy sector is still bringing down overall earnings. Excluding Energy, earnings for remaining S&P 500 companies would be slightly up 0.1% on 2.4% higher revenues.

Third quarter earnings growth estimates are steadily coming down, indicating that business leaders are not expecting standout performance. Are companies sandbagging expectations to improve the odds of a positive surprise? That’s highly possible. However, we’re not expecting to see meaningful growth pick up this quarter.

Next week, we’ll get a look at notes from the last Federal Reserve Open Market Committee meeting. We’ll analyze these meeting minutes to get a sense of what the Fed is thinking about the economy and see how different members of the committee are voting. The rest of the week is also full of important economic releases, which could stoke volatility if we see any surprises. When markets experience a sustained rally over a period of weeks, it’s not surprising when investors pause for a breather to reevaluate the data.

Have questions about how all of this data impacts your portfolio as an investor? We’d love to chat with you. Feel free to leave a comment below or reach out to us at hello@hzcapital.com if there is anything you’re curious about. As always, our goal is to make sure you’re informed on the latest economic updates.

ECONOMIC CALENDAR:

Monday: Empire State Manufacturing Survey, Housing Market Index, Treasury International Capital

Tuesday: Consumer Price Index, Housing Starts, Industrial Production

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

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HEADLINES:

Consumer sentiment increases in August. A measure of American optimism about the economy increased this month, hopefully supporting future consumer spending.

Retail sales remain flat in July. Sales of retail goods remained surprisingly unchanged last month as Americans cut back on purchases, moderating expectations of a surge in consumer spending this quarter.

Business inventories rise slightly in June. Business stockpiles edged higher in June as sales surged, suggesting U.S. firms are having an easier time moving products off shelves.

Job openings edge higher in June. The number of available jobs rose slightly over May, suggesting moderate growth. An increased number of factory job postings could indicate movement in the manufacturing sector.

Stocks Bounce After Jobs Blowout – Weekly Update for August 8, 2016

S&P 500 at (1)

Stocks bounced last week, ending sharply higher after a better-than-expected jobs report. For the week, the S&P 500 gained 0.43%, the Dow rose 0.60%, the NASDAQ added 1.14%, but the MSCI EAFE lost 1.41%.

Among last week’s major events was a shockingly good July jobs report. Last month, the economy added 255,000 new jobs, blowing away expectations of 180,000 jobs. Even better, the gains were broad-based and the labor force participation rate (an area of concern because fewer people in our population were actively participating in the labor force) ticked upward. Overall, not too shabby.

Headline unemployment remained stable at 4.9%, but that single number hides a lot of complexity. We’d like to dig a little deeper. The chart below shows six different measures of unemployment, each slicing the data in a different way.

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The U-6 unemployment rate is the most comprehensive, showing total unemployed, marginally attached workers (discouraged workers and those considered barely employed), and those total employed part time for economic reasons.

You can see that all measures rose during the recession and have been steadily dropping ever since. While headline unemployment (U-3 unemployment in official parlance) stands at 4.9%, U-6 is still at 9.7%, almost two percentage points higher than the pre-recession low of 7.9% achieved in 2006. This indicates that there are many people who haven’t participated fully in the labor market recovery; however, the rate has fallen significantly from the 17.1% high it reached in 2009. All told, most areas of the labor market are still making gains.

Britain’s central bank moved to lower interest rates to fight the Brexit blues. The Bank of England cut interest rates for the first time in nearly seven years and announced an aggressive round of bond purchases to stimulate economic activity. The bank is moving quickly to head off a possible economic blowback from Britain’s vote to exit the European Union.

Will the Federal Reserve raise rates while one of our major trading partners is going the other way? We’ll be sure to keep you updated.

 

ECONOMIC CALENDAR:

Tuesday: Productivity and Costs
Wednesday: JOLTS, EIA Petroleum Status Report, Treasury Budget
Thursday: Jobless Claims, Import and Export Prices
Friday: Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment

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HEADLINES:

Motor vehicle sales miss expectations. July sales of cars and trucks by major U.S. automakers slipped as pent-up demand slackened.

Consumer spending increases more than expected. Spending by American consumers rose more than expected in June, suggesting consumption remained strong throughout the second quarter.

Factory orders fall. New orders for manufactured goods fell in June for the second month in a row, though stabilizing business spending offers some hope.

Construction spending falls to one-year low. Spending on construction projects fell in June, suggesting a downward revision to second-quarter economic growth may come.

Q2 GDP Estimate: Present & Future Impact – Weekly Update for August 1, 2016

 

Q2 GDP Estimate: Present & Future Impact - Weekly Update for August 1, 2016

Stocks broke their four-week winning streak, closing mixed after the release of a surprisingly low estimate of second-quarter economic growth. For the week, the S&P 500 lost 0.07%, the Dow fell 0.75%, the NASDAQ grew 1.22%, and the MSCI EAFE added 2.36%.

The preliminary estimate of Q2 Gross Domestic Product (GDP) growth showed that the economy only grew 1.2% last quarter versus the 2.6% growth expected. Investors were understandably disappointed as they had hoped for a resurgence after a slow first quarter, but professional economists were surprised as well. The New York Fed had forecasted GDP growth of 2.1% and the Atlanta Fed had predicted 2.3% growth. Why the shock?

Digging deeper into the data, we find that the disappointment came from an unexpected fall in business inventories. On the positive side, the drop may boost future economic growth as businesses rebuild their stockpiles. Consumer spending was strong, growing 4.2% over the previous 12 months, and accounting for nearly all the GDP growth we saw.

So, though the headline number wasn’t thrilling, the underlying trends in consumer spending, labor market growth, and higher savings rates could set up a banner third and fourth quarter.

During last week’s Federal Open Market Committee meeting, the Federal Reserve’s monetary policy makers voted to hold rates steady, which was not a surprise. Citing recent economic data, the central bank said that “near-term risks to the economic outlook have diminished,” setting the stage for the next rate hike.

Will rates increase in September? December? Or will the Fed wait until 2017? We don’t know. Wall Street bets on future rate hikes suggest that most traders don’t think the Fed will move until December if they don’t wait until 2017.

The good new is the Fed seems confident enough in economic growth to cut back on stimulus. On the other hand, speculation around the timing of future rate hikes will continue to be a major market theme this year and may stoke additional volatility.

This week, investors will be watching Friday’s July labor market release and digesting more corporate earnings reports. We look forward to keeping you informed.

 

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

Tuesday: Motor Vehicle Sales, Personal Income and Outlays

Wednesday: ADP Employment Report, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Factory Orders

Friday: Employment Situation, International Trade

 

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HEADLINES:

Weekly jobless claims rise. The number of Americans filing claims for new unemployment benefits rose by 14,000, but the underlying trend still shows strength in the labor market.

Consumer sentiment drops in July. A measure of how consumers feel about the U.S. economy slipped as worries about the Brexit and the presidential election weighed on Americans.

June new home sales surge. Sales of new single-family homes rose to the highest levels in nearly 8-1/2 years. Sales were up 25.4% over June 2015, indicating that the housing market may be gaining momentum.

Durable goods plunge in June. Orders for long-lasting manufactured goods dropped, indicating weak overseas demand is affecting U.S. factories. Economists had predicted a 1.4% decline over June, but orders for goods like aircraft, appliances, and machinery actually fell 4.0%.

Another Record-Setting Week for the S&P 500 – Weekly Update for July 25, 2016

 

Another Record-Setting Week for the S&P 500

Stocks ended a fourth straight week of gains, sending the S&P 500 index to another record high. For the week, the S&P 500 gained 0.61%, the Dow grew 0.29%, the NASDAQ added 1.40%, and the MSCI EAFE closed flat.

Second-quarter earnings season is in full swing, and the picture thus far shows slight but present growth in revenues; however, there are encouraging signs that could presage even better performance in the months to come.

As of Friday, we have data from 126 S&P 500 companies, accounting for almost one-third of the index’s total capitalization. Overall Q2 earnings for these companies are down 1.1% from the second quarter of last year on 2.6% lower revenues. On the positive side, over 70% have managed to beat earnings estimates, indicating that managers did a good job of realistically predicting their performance levels as well as revealing pleasant surprises for their investors. In additon, there are plenty of revenue surprises from firms that saw more demand than expected.

The long-term picture for U.S. firms appears to be improving. Revenue growth is tracking above what we saw from this same group in the first quarter. That’s a good sign that demand is better than it was earlier this year.

In the week ahead, all eyes will turn to the Federal Reserve’s Open Market Committee Meeting to see what guidance the central bank will issue. Though virtually no one on Wall Street expects the Fed to raise interest rates at this meeting, many analysts believe strong domestic data will give the Fed the confidence it needs to raise rates before the end of the year. Traders will be watching closely to see whether the Fed strengthens the language in its statement to prepare markets for a future hike. The week ahead is also a decisive one for earnings, with nearly 1,000 companies reporting, including 189 S&P 500 firms.

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ECONOMIC CALENDAR:

 Monday: Dallas Fed Manufacturing Survey

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, Pending Home Sales Index, EIA Petroleum Status Report, FOMC Meeting Announcement 2:00 PM ET

Thursday: International Trade in Goods, Jobless Claims

Friday: GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment

 

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HEADLINES:

June housing starts rise. Groundbreaking activity on new homes rose 4.8% last month, beating expectations. However, revised May numbers suggest the housing sector isn’t picking up speed.

Weekly jobless claims fall to three-month low. The number of Americans filing for new unemployment benefits fell last week to the lowest reading since April, supporting strong labor market trends.

Home resales rise in June. Sales of existing homes surged 1.1% last month to the fastest pace in nine years. Low mortgage rates likely contributed.

Manufacturing activity expands more than expected. A measure of manufacturing sector activity surged to a nine-month high in July, indicating that demand for U.S. factory goods may be rising in the third quarter.

New Records for Stocks Despite Recent Terror – Weekly Update for July 18, 2016

New Records for Stocks Despite Recent Terror

Stocks were up for the third week in a row, posting record highs on better-than-expected earnings results and solid domestic economic data. Since the bottom of the post-Brexit selloff, the S&P 500 has gained 8.06%. For the week, the S&P 500 gained 1.49%, the Dow grew 2.04%, the NASDAQ added 1.47%, and the MSCI EAFE grew 3.65%.

Despite the upbeat data, global violence has created some uncertainty for investors. On Thursday, a terrorist drove through hundreds of people in Nice, France, killing at least 84. A thwarted coup by Turkey’s military on Friday resulted in hundreds of deaths and could lead to political instability after the president rounded up thousands of suspected plotters. Just yesterday, three police officers were killed in Baton Rouge, Louisiana. Our thoughts and prayers are with the victims’ families in these tragedies.

One of the goals of terrorism is to cause financial damage as its effect on markets and economies are measurable; however, the human cost of violence is incalculable and its effects will be felt for many years to come. During these tough times, it is our responsibility to analyze the economic impact of terror so that we and our clients are informed to invest wisely.

The effect of terrorism on global financial markets is usually limited. Some estimates show that 9/11, the largest terrorist attack on U.S. soil, reduced U.S. economic growth by half a percentage point. However, the S&P 500 regained its lost ground within a month. When terrorists attacked the London tube in 2005, the UK market fell sharply. It recovered within days and the British economy actually rose 0.8% that quarter. Tourist locations often suffer more from terrorist attacks because they depend on visitors who may choose to visit destinations with safer recent histories.

With markets at record highs, it’s possible that we could see a pullback as investors sell first and ask questions later. However, the rally is broad-based and is built on solid fundamentals: June hiring data was strong, retail sales are sharply up, and early reads on corporate profits are favorable.

Our View

Our hearts go out to the victims of violence in Baton Rouge, Nice, and Istanbul. We don’t know whether markets will react negatively to renewed security fears, as history indicates that markets are resilient to violence. However, past performance is no guarantee for future results. Though we don’t believe that individual attacks are enough to push us into a correction, the headline risk from developing security situations is real.

As markets reached new highs last week, we should expect continued volatility in the weeks to come. While domestic data is positive, there are plenty of headwinds to give investors pause. Keeping an even keel during both the highs and lows is key to successful long-term investing. As always, we’ll keep you updated.

 

 

ECONOMIC CALENDAR:

Monday: Housing Market Index, Treasury International Capital

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Retail sales jump 0.6%. U.S. retail sales rose more than expected last month, supporting the view that the economy experienced solid growth last quarter.

Consumer sentiment falls in July. Americans held a more pessimistic view of the economy in July as they became concerned about future growth.

Business inventories rise slightly in May. Stockpiles held by U.S. businesses rose 0.2% in May as retailers restocked to meet buyer demand.

Beige book shows U.S. economic growth is moderate. A report issued by the Federal Reserve shows that the economy grew “moderately” in most districts though inflation remains muted.

S&P Hits New High on Jobs Surge – Weekly Update for July 11, 2016

Stocks surged after Friday’s better-than-expected June jobs report. The S&P 500 closed Friday less than a point from its record closing high of 2,130.82 reached in May 2015. Last spring was the only time the index had ever closed above 2,130… until now.

Today, the rally continued as the S&P 500 set a record intraday high of 2,143.13, topping its previous all-time high by nearly 10 points. Closing above its May 2015 record at 2,137.16, the S&P 500 confirms the second-longest bull market in its history. In addition, the NASDAQ crossed 5,000 for the first time in 2016. Despite global worries, we’re happy to see that investors are responding to success stories at home.

After April and May jobs reports introduced worries of a labor market slowdown, the June report showed that the economy added 287,000 new jobs last month. Since expectations called for around 165,000 jobs, investors counted the report as a solid win for the economy.

How many jobs does the economy need to support sustainable growth? According to a survey of Wall Street Journal economists, the break-even number for sustainable labor growth could be an average of 145,000 new jobs per month. Fewer new jobs, and the economy won’t be able to keep up with population changes as older workers retire and young adults join the workforce.

As with all things economic, there are other opinions. In 2013, the Federal Reserve Bank of Chicago estimated that the economy could get by with just 80,000 new jobs each month; Federal Reserve Chair Janet Yellen stated in December that under 100,000 new jobs per month are needed. You can see in the chart below that the labor market has produced above those estimates in most months since the beginning of 2014.

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Digging a little deeper into the June numbers gives us more positive news. The unemployment rate rose to 4.9%, which is actually a good thing because it rose as a result of more job seekers entering the labor pool. The Federal Reserve estimates that long-run unemployment in a healthy economy should average between 4.7% and 5.0%.

Even better, average hourly earnings rose 2.6% over June 2016, indicating that the labor market is tightening and employers are raising wages to compensate. Since economists had been worrying about the stagnant pace of wage growth, the June data is encouraging.

Our View

After June’s strong job report, it’s clear investors are feeling pretty good about the U.S. economy. The market has overcome many obstacles in 2016, and this record-breaking day for the S&P 500 reinforces our philosophy as long-term investors. While a healthy labor market supports continued economic growth and market upside, we expect additional volatility in the weeks to come. We still face a turbulent presidential election, corporate earnings season, Britain’s EU exit, and other market headwinds. Enjoy the rally and stay focused on your goals as we continue to pursue our goal of protecting and increasing your wealth.

 

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: Import and Export Prices, EIA Petroleum Status Report, Beige Book, Treasury Budget

Thursday: Jobless Claims, PPI-FD

Friday: Consumer Price Index, Retail Sales, Empire State Manufacturing Survey, Industrial Production, Business Inventories, Consumer Sentiment

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HEADLINES:

Factory orders shrink. New orders for manufactured goods fell in May, but unfilled orders and falling business inventories hold promise for future demand.

China’s inflation drops. Last month, a measure of consumer inflation in China grew at its slowest pace since January on persistently weak demand. More government stimulus is likely to prop up the ailing economy.

Weekly jobless claims fall. The number of Americans claiming new unemployment benefits fell by 16,000 last week, adding more evidence that the labor market is on solid ground after May’s miss.

Service sector expands to seven-month high. An indicator measure service sector activity—a component of the economy that accounts for 80% of economic growth—rose in June, suggesting continued strength.