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

S&P 500 Tops 2,000-May Slow Down Weekly Update – September 2, 2014

Image courtesy of FreeDigitalPhotos.net/pakorn

Image courtesy of
FreeDigitalPhotos.net/pakorn

Despite volatility around geopolitical concerns and sluggish growth in Europe, U.S. stocks had a phenomenal week, lifting the S&P 500 to a new record close, and giving the index its best August performance since 2000.1 For the week, the S&P 500 picked up 0.75%, the Dow grew 0.57%, and the Nasdaq gained 0.92%.2

The Ukrainian crisis ratcheted up to a new level of tension as reports emerged that Russian forces have actively invaded eastern Ukraine and are engaging local forces. Although Russian and Ukrainian leaders met last week, the two sides appear more fiercely opposed than ever. It’s hard to know how Russia’s ambitions in the region will affect markets, but interruptions in gas supplies will not be good for Europe’s economy.3

Investors got their second look at Q2 Gross Domestic Product (GDP) numbers and cheered at the news that the economy grew 4.2% (upgraded from 4.0% in the initial estimate). Even better, growth appears to be broad-based and spread among multiple sectors of the economy.4 This result indicates that the economic recovery is entering a sustainable cycle of growth, where improvement in one area of the economy feeds growth in another. Let’s hope so.

Looking ahead, the first week of September is packed with important data. Friday’s August jobs report is especially critical because it could shed some light on the timing of the Federal Reserve’s interest rate hikes. Investors will also have their eyes glued to Thursday’s European Central Bank meeting, seeking a response to the EU’s stalled recovery and dwindling economic hopes.

Geopolitical concerns around Ukraine, Syria, and Iraq will also likely continue to dominate headlines, and volatility is to be expected. European leaders are considering a fresh round of sanctions against Russia, which may cause volatility as investors think about how sanctions may affect global growth.

All told, new record highs and low summer trading volume may transform into additional volatility and more activity in coming weeks. Depending on how these variables play out, a short-term pullback is also possible as investors take profits off the table. This is simply the nature of the investor sentiment pendulum that swings between optimism and pessimism, driving overall buying and selling activity. While we believe that additional upside may be possible this year, we caution our clients to expect periods of volatility as major events shift investor sentiment.

 

ECONOMIC CALENDAR:

 

Monday: U.S. Markets Closed for Labor Day Holiday

Tuesday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Wednesday: Motor Vehicle Sales, ADP Employment Report, Factory Orders, Beige Book

Thursday: International Trade, Jobless Claims, Productivity and Costs, ISM Non-Mfg. Index, EIA Petroleum Status Report

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

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HEADLINES:

Personal income rises, but household spending falls. Personal income – defined as income from wages, investments, and other taxable sources – grew in July, following an increase in June. Despite the increase, Americans pared back their spending, preferring to bank their extra cash rather than go shopping. This reluctance could indicate a lack of confidence in their prospects.5

Consumer sentiment ticks upward. An August survey of consumer sentiment grew on the back of increased optimism about jobs and increasing wealth. However, most of the positivity was in the upper income segments, indicating that lower-income Americans may still be struggling.6

New home sales drop, again. July sales of newly built homes dropped for the third month in a row. On the other hand, new home sales were 12.3% higher than in July of 2013, indicating that momentum is still up over last year, which means that a turnaround is still possible.7

Durable goods orders soar. Orders for long-lasting manufactured goods skyrocketed by 22.6% in July. Though this is good news for the manufacturing sector, the surge was largely driven by a spike in volatile aircraft orders, meaning the underlying trend may soften next month.8