By Kevin Theissen
The markets closed mixed for the month as investors grappled with oil prices, a volatile technology sector and news from central bankers.
The Dow Jones Industrial Average gained 1.62 percent while the Standard & Poor’s 500 Index added 0.48 percent. But the NASDAQ Composite slipped 0.94 percent, according to The Wall Street Journal, June 30, 2017.
Stocks moved mostly higher in early June, until selling in technology stocks caused markets to give back much of their first-week gains. The sell-off of mega-cap technology stocks continued into the following week, causing a headwind that kept stock prices mixed.
Interest rate reaction
The Fed’s announcement of a rate hike on June 14 was expected by stock investors and greeted uneventfully. However, Treasury prices rose on the news, stirring some concerns about how this may affect future Fed decisions.
Stocks eventually found firmer footing as investors revisited the technology sector, oil crawled out of bearish territory, and strong housing data bolstered economic optimism.
As the month entered its final week, stock and bonds gyrated as the markets interpreted comments by the president of the European Central Bank (ECB) that it may soon begin winding down its portfolio of bonds, heralding perhaps the end to its accommodative monetary policy.
The abrupt and widespread selling of bonds, here and abroad, led ECB officials to walk back those comments.
Sector performance was widely divergent as consumer discretionary (-1.74 percent), consumer staples (-2.94 percent), energy (-2.97 percent), technology (-2.86 percent), and utilities (-2.55 percent) suffered substantial reversals, while financials (+4.57 percent), health care (+4.56 percent), and materials (+1.11 percent) enjoyed healthy gains. Meanwhile, industrials (+0.21 percent) and real estate (+0.69 percent) closed incrementally higher.
What investors may be talking about in July
In the weeks ahead, some investors may turn their attention to the quarterly productivity report released in early June by the Bureau of Labor Statistics.
Productivity is the ratio between the volume of goods and services produced per unit of input. Most commonly that unit of input is hours worked otherwise known as labor productivity.
Higher productivity is fundamental to wealth creation. It drives new industries and sustains growing corporate profits—a crucial funding source for increased business investment and higher worker wages. As Fed Chair Janet Yellen once remarked, productivity is “the most important factor determining living standards.”
In the first quarter of 2017 productivity growth was flat, and just 1.2 percent higher from a year earlier, according to The Wall Street Journal. Since the fourth quarter of 2007, productivity growth has averaged 1.1 percent per year, well below the post-WWII average of 2.3 percent, according to the Bureau of Labor Statistics, June 2017.
The economy’s weak productivity growth, however, is not a recent phenomenon. The 20-year average for the period ending in 1990 was a full percentage point lower than the previous 20-year period ending in 1970. Had economic productivity not slowed, the GDP might be higher today.
These tepid productivity numbers, in part, explain why wages and corporate profits have struggled despite nearly eight years of economic expansion.
The turmoil that gripped the month’s final week erased some gains that had accumulated over the course of the month, but the MSCI-EAFE Index, nevertheless, closed higher by 0.3 percent.
European stocks ended mostly lower in June, as good news over a Greek bailout agreement and action to address Italian banking problems competed with political uncertainty in the U.K. and the unhelpful comments by the ECB.
Italy was the best performing major European index. Pacific Rim markets were more positive, with the Nikkei notching a solid gain.
Gross Domestic Product: First-quarter GDP growth was revised higher, from 1.2 percent to 1.4 percent, according to The Wall Street Journal, June 29, 2017.
Employment: The unemployment rate fell to 4.3 percent, touching its lowest level in 16 years, despite weak job creation of just 138,000 new jobs in May. Even though employers are experiencing difficulty finding the workers it needs in this tight labor market, wage pressures continue to be restrained, with wage growth rising just 2.5 percent from last year.
Retail Sales: Retail sales fell 0.3 percent, the sharpest drop since January 2016.
Industrial Production: Industrial production was flat last month, dragged down by a contraction in manufacturing output.
Housing: Housing starts fell 5.5 percent, marking the third consecutive month that new-home construction has faltered. Nevertheless, housing starts in the first five months of 2017 are 3.2 percent higher than over the same period last year.
Sales of existing homes, which account for about 90 percent of home purchases, rose 1.1 percent in May. Tight inventories and healthy demand drove median prices higher by 5.8 percent from a year earlier to $252,800.
Further evidence of a healthy housing market came with reports of a jump of 2.9 percent in new home purchases, and the median sales price posting its highest ever recorded number ($345,800).
CPI: Inflation continued to ease, as consumer prices fell 0.1 percent in May. Compared to a year earlier, prices rose just 1.9 percent, marking the third consecutive month the annual rate of price increases has slowed.
Durable Goods Orders: Orders for durable goods dropped 1.1 percent, the second month in a row that orders have declined. They have, however, remained higher by 2.8 percent in the first five months of 2017 than the same period last year.
The Fed announced a quarter of a percentage point hike in the federal funds rate, as was expected by the market.
It also set in motion a plan to wind down its portfolio, announcing that it would start allowing up to $6 billion in maturing Treasuries and $4 billion in maturing mortgage bonds every quarter to go unreinvested. The amount not rolled over would increase incrementally each quarter until a ceiling of $30 billion in Treasuries and $20 billion in mortgage bonds is reached.
Kevin Theissen is principal and financial advisor at Skygate Financial Group, LLC., located on Main Street in Ludlow, Vt. He can be reached at email@example.com.