Column
August 16, 2017

Monthly market insights, a reflection on July’s economy

By Kevin Theissen
U.S. markets

The markets closed sharply higher for the month of July, fueled by strong corporate earnings, solid economic data and dovish comments by the Federal Reserve.

The Dow Jones Industrial Average gained 2.54 percent while the Standard & Poor’s 500 Index increased 1.93 percent. The NASDAQ Composite picked up 3.38 percent, according to Wall Street Journal, July 31, 2017.

The month began on a mixed note as stocks suffered steep declines on interest rate fears and geopolitical concerns. However, the bulk of those losses were erased on the following day, closing out the Fourth of July holiday-shortened first week of trading.

Markets set new high

With the dawn of a new earnings season upon the markets, optimistic expectations for corporate profits, continued dormant inflation, and comments by Fed Chair Janet Yellen that the Fed was in no rush to tighten monetary reins drove the Dow Jones Industrial Average and S&P 500 to new records. The more technology-centric NASDAQ Composite was not left behind, actually turning in a stronger week than both the Dow and the S&P.

Earning season

Positive earnings reports, a rise in oil prices, and strong economic data fueled further stock price advances, sending several major indices to fresh all-time highs. Earnings have been especially strong in the second quarter. According to one analysis, with 57 percent of the S&P 500 companies reporting as of July 28, actual earnings have come in 6.4 percent higher than estimated, with 73 percent of companies generating earnings in excess of their five-year average, according to FactSet Research Systems, Inc., July 28, 2017.

The markets drifted modestly lower in the month’s final full week of trading, weighed down by disappointing earnings reports from key industry leaders in technology and healthcare. The month closed out with the Dow establishing yet another record high, even as technology stocks retreated.

Sector scorecard

Most industry sectors ended higher, led by Energy (+3.07 percent) and Technology (+2.99 percent). Other sectors enjoyed meaningful gains as well, including Consumer Discretionary (+1.51 percent), Financials (+1.59 percent), Materials (+1.64 percent), and Utilities (+1.11 percent). The remaining sectors, Consumer Staples (-0.16 percent), Health Care (-0.15 percent), Industrials (+0.40 percent) and Real Estate (+0.28 percent) closed the month with little change, according to Interactive Data Managed Solutions, July 31, 2017.

What investors may be talking about in August

Aside from a few temporary spikes, volatility has been unusually low in 2017. Indeed, the VIX hit its lowest level in 23 years in early June, according to S&P Dow Jones Indices, July 2017. Nevertheless, the next two months, August and September, have delivered a disproportionate share of negative surprises to investors over the years. According to one analysis at InvestmentNews, a third of all monthly declines of 5 percent or more have happened in these two months.

Whether the following two months are more like August and September of 2016 (declines in the S&P 500 of 0.12 percent in each month) or similar to August and September of 2015 (-6.26 percent and -2.64 percent, respectively) is unknowable, but there may be several potential threats to today’s relative calm, including:

A change in stock leadership. Technology stocks, which have led markets higher in the first half of 2017, have pulled back. If this retreat portends a change in market leadership, this changing of the guard may involve increased price volatility until new leadership is cemented.

Geo-political developments could unnerve the markets. While North Korea may be a top candidate whose actions could upset global markets, it may be the geopolitical event we don’t see coming that sparks heightened volatility.

Surprises in monetary policy could be poorly received by bond and equity markets. A change in rates may shift money away from stocks and into bonds.

World markets

Rising economic optimism in Europe propelled overseas markets higher, as the MSCI-EAFE Index climbed 2.58 percent.

European markets were mixed despite the headwind of a strengthening euro. European investors were encouraged by solid earnings reports and growing investor conviction in the durability of the continent’s economic recovery.

Owing to a rebound in commodity prices, Australia closed flat for the month while Hong Kong surged higher, according to MSCI.com.

Indicators

Gross Domestic Product: The economy grew at an annualized rate of 2.6 percent in the second quarter as both consumers and businesses stepped up spending. This quarter’s increase was substantially higher than the first quarter’s growth rate of 1.2 percent, though it remains to be seen whether this signals gathering economic momentum or is a repeat of a recent pattern where tepid growth in the winter is followed by stronger numbers in the spring and summer.

Employment: The U.S. economy added 222,000 jobs in June, smashing through consensus estimates and reaffirming the economy’s good health. Strong demand for workers pulled individuals from the sidelines.

Retail Sales: Consumer retail spending declined 0.2 percent, making it the second straight month of falling sales and marking the first time of back-to-back monthly decreases since August of 2016.

Industrial Production: Propelled by an increase in oil drilling and coal mining, industrial production rose 0.4 percent. The second quarter’s industrial output rose at an annual rate of 4.7 percent, a significant increase over the first quarter’s sluggish 1.4 percent growth rate.

Housing: Housing starts rebounded strongly in June, rising 8.3 percent after three straight months of declines. It was also the biggest monthly jump since November 2015.

A shrinking inventory depressed sales of existing homes and drove prices higher as June saw a decline of 1.8 percent in purchases and a jump in the median price of existing homes, which reached a record high of $263,800, up by 6.5 percent from a year earlier.

New home purchases increased 0.8 percent, a subdued number reflecting a tightness in supply stemming from a labor shortage and a focus by builders on higher-end homes.

CPI: Inflation was flat in June, as falling energy prices and stable food costs offset a rise in the cost of shelter.

Durable Goods Orders: A big jump in orders for civilian aircraft led to a 6.5 percent rise in durable goods orders, the biggest increase in orders of long-lasting goods in nearly three years.

The Fed

The Fed indicated that it may be ready as soon as September to begin reducing its over $4 trillion portfolio of bond securities that it accumulated in its efforts to spur an economic recovery following 2008. The Fed voted to keep rates unchanged, but showed no signs that recent economic and inflationary data would alter its plans to potentially hike rates once more before the calendar year ends.

Kevin Theissen is principal and financial advisor at Skygate Financial Group, LLC., located on Main Street in Ludlow, Vt. He can be reached at kevin@skygatefinancial.com.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

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