Broker Check

In the Markets July 25, 2016

| July 25, 2016

Stocks managed a fourth straight week of gains, allowing the S&P 500 LargeCap and the S&P 400 MidCap indexes to claim new record highs.  The technology-heavy NASDAQ rallied over 70 points on strong earnings reports from Microsoft and semiconductor firm ASML Holdings.  For the week, the Dow Jones Industrial Average gained an additional +54 points to close at 18,570, up +0.29%.  All of the major U.S. indices were up as the LargeCap S&P 500 rose +0.61%, the MidCap S&P 400 gained +0.56%, and the SmallCap Russell 2000 added +0.63%.  The best-performing U.S. index, the NASDAQ Composite, surged +70 points and closed at 5,100, up +1.4%.  Interestingly, defensive plays such as Utilities stocks continue to rally with the broad market—the Dow Jones Utility Average gained 1.45% last week as well.

In commodities, precious metals lost their luster, experiencing a second week of losses.  Gold fell -$14.30 to $1323.40 an ounce, down -1.07%.  Silver, likewise, fell -$0.61 to $19.69 an ounce.  Crude oil fell over -4.5% to $44.19 a barrel for West Texas Intermediate.  Commodities as a group continue to be pressured, as the Commodity Research Bureau (CRB) Index fell -3.16% last week.

In international markets, almost all major international markets recorded gains last week.  Canada’s TSX shrugged off weakness in the energy sector and rose +0.82%.  The United Kingdom’s FTSE appears to be ignoring economists’ prophecies of economic doom following the Brexit vote, and rallied +0.92% - its fifth straight week of gains.  On mainland Europe, Germany’s DAX gained +0.8%, France’s CAC 40 rose +0.2%, and Italy’s FTSE MIB index added +0.18%.  Markets were mixed in Asia, where China’s Shanghai Composite fell -1.34%, Hong Kong’s Hang Seng index rose +1.41%, and Japan’s Nikkei gained +0.78%.

In U.S. economic news, applications for unemployment benefits fell by 1,000 to 253,000 as jobless claims remained below the 300,000-level for the 72nd consecutive week.  Forecasts had called for a seasonally-adjusted 260,000 initial jobless claims last week.  Claims have now remained below 300,000, a key benchmark, for the longest streak since 1973.  The 4-week average of new jobless claims, smoothed to reduce volatility, declined by 1,250 to 257,750 according to the Labor Department.  Continuing jobless claims, which counts those already receiving benefits, declined by 25,000 to 2.13 million in the week ended July 9th

Sentiment among U.S. home-builders diminished in July, according to the National Association of Home Builders (NAHB) index which fell 1 point to 59 after 4 months of unchanged readings.  Economists had expected the index to remain at 60.  All 3 of the indexes sub-gauges declined.  The index of current conditions fell 1 point to 63, the gauge for the upcoming 6 months gave up 3 points to 66, and buyer traffic declined by 1 to 45.  Readings over 50 signal improvement.  Builder confidence peaked at a 10-year high last fall, but has remained in a relatively narrow range since.  Builders continue to report difficulty finding lots and labor according to a statement released by the NAHB.

Housing starts jumped +4.8%to a seasonally-adjusted annual pace of 1.19 million last month as supply still lagged demand, according to the Commerce Department.  Economists had forecast a 1.17 million pace.  Permits, which serve as an indicator of future demand, rose +1.5% to an annualized 1.15 million.  For the second quarter, starts are averaging a 1.16 million annual rate, up slightly from the first quarter.  Single-family starts, viewed as an indicator of the health of the housing market, jumped +4.4% last month to an annualized rate of 778,000, however starts are down -3.6% in the 2nd quarter compared to the 1st quarter.  Builders have been reluctant to step up construction to pre-recession levels, likely due to the traumatic experience of the housing bust.  According to the NAHB, half of all housing lots were priced at or above $45,000, the highest median housing lot value ever—surpassing the median $43,000 set in 2006 when single-family starts were double their number now.

Sales of previously owned homes rose last month to a fresh new high, evidence that the existing-home market continues to be on firm footing.  Existing-home sales rose 1.1% to a seasonally adjusted annual rate of 5.57 million in June, according to the National Association of Realtors.  Home sales are 3% higher than this time last year and are the strongest since February of 2007.  Economists had expected a lower rate of 5.47 million.  First-time buyers comprised 33% of all purchases, the highest percentage in 4 years.  Investor purchases declined to 11%, the lowest since July 2009.  Supply is 5.8% lower than it was a year ago, the 13th consecutive month of yearly declines, once again driving up prices and making many houses unaffordable.  Trulia’s Chief Economist Ralph McLaughlin reported that at the current sales pace, there is only a 4.3 month supply of homes on the market—the lowest since 2005.  In June, the median home price was $247,700, up +4.8% from a year ago.

Manufacturing continues to be under pressure, according to the Philadelphia Fed’s regional manufacturing index which fell into contraction with a -2.9 reading this month, down from positive 4.7 last month.  This is the 9th month of declining activity in the past 11 months and the slowest pace in half a year.  Economists had expected a positive 3.5.  This follows the weakness in the New York Fed’s regional manufacturing index, known as the Empire State index, which was down to a barely positive 0.6.  However, some of the key details were positive.  The new orders index, viewed as a proxy of future business activity, rose to 11.8 up from -3 last month.  Shipments also increased to 6.3 from -2.1.  Furthermore, more manufacturers in the Philadelphia region expect business to be better 6 months from now, according to the future general activity index which rose 4 points to 33.7.

Markit’s flash manufacturing Purchasing Managers Index (PMI) index rose to a 9-month high of 52.9 from 51.3, as production and employment strengthened.  Domestic demand remained the main driver of growth where new orders rose to a 9-month high according to Markit.  Exports also increased in June, but at a slower rate than domestic orders.  Manufacturers are benefiting from U.S. consumers as solid housing and automotive markets drive consumer spending on manufactured goods.  Factories grew payrolls by the most in 12 months due to the increased activity.  Chris Williamson, Markit’s chief economist, wrote that “July saw manufacturers battle against a strong dollar, the ongoing energy sector downturn and political uncertainty ahead of the presidential election, yet still achieved the best growth seen since last year.”

In international economic news, Canadian government bonds dropped sharply Friday after higher than expected readings in consumer inflation data and retail sales.  Canada’s consumer price index rose +0.2% month over month in June, beating forecasts by 0.1%.  Core CPI rose +2.1%.  Retail sales jumped +0.2% month over month, exceeding expectations of a flat reading.

In the United Kingdom, data firm Markit reported that private sector activity in the U.K. fell to its lowest level since 2009.  The firm’s Purchasing Managers Index (PMI) fell into contraction (sub-50) at 47.7, down from 52.4 in June.  It was the biggest one month fall on record for the index and was noted as a “dramatic deterioration” attributed to the June 23rd “Brexit” vote.  A flash reading on the manufacturing sector dropped to 49.1 from 52.1 in June, as well.

For the Eurozone overall, the flash PMI reading for the services sector was 52.7, down 0.1 point from June.  Manufacturing dipped to 51.9 vs. 52.8 the previous month.  Business activity settled to an 18-month low and indicates a 1.5% annual growth rate, according to Markit.  Breaking out individual countries, Germany’s flash services reading was 54.6, up 0.9 from June, while manufacturing fell 0.8 point to 53.7.  In France, there was a rebound in services to 50.3, up 0.4 point and back into expansion, while manufacturing remained in contraction at 48.6.

In Japan, the BBC reported that Bank of Japan Governor Kuroda said that he has ruled out the idea of using “helicopter money” to combat deflation.  “Helicopter money” is a euphemism based on American economist Milton Friedman’s suggestion that central banks could spur an economy simply by printing money and distributing it to consumers by throwing it from helicopters.   Kuroda believes that the Bank of Japan has the tools in place to revive the economy and spur inflation if needed.

In China, recent economic data suggests that there is little evidence that China has been implementing structural reforms to overhaul its economy, but instead is continuing down the path of credit-fueled growth.  Second quarter gross domestic product growth came in at 6.7%, matching forecasts.  China reported that industrial production and retail sales growth beat expectations last month.  However, fixed asset investment cooled more than expected for the first half of the year.

Finally, as noted above, last week’s unemployment claims came in lower than expected at 253,000, well below the widely-cited benchmark of 300,000.  The reading was the second lowest in the 7 years since the economy bottomed in early 2009.  Claims have now remained below 300,000 for 72 weeks - the longest stretch of sub-300,000 readings since 1973.  Initial claims for unemployment is considered by some analysts as one of the more useful indicators for anticipating future economic expansion or recession, and at this point the number shows no signs of breaching the 300,000 level any time soon.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet)