Markets were volatile last week as political events continued to dominate headlines. On Wednesday, revelations related to President Trump’s dismissal of FBI Director James Comey unnerved investors; the 373-point drop in the Dow Jones Industrial Average was the Index’s largest decline in more than eight months. Markets recovered a portion of Wednesday’s sell-off on Thursday and Friday and markets are up today as economic data provided some reassurance of favorable business conditions. Jobless claims, which dropped to near-record lows, point to tight labor markets and rising wages. The Philadelphia Federal Reserve’s monthly survey of manufacturing conditions signaled continued improvement in factory activity, including strength in new orders and backlogs. Also, earlier in the week, the Industrial Production report for April showed accelerating manufacturing activity; an increase in spending on major equipment purchases underscores growing confidence in the economic outlook. Deere’s earnings report corroborated signs of an improving industrial economy with the company forecasting an 18% rise in equipment sales for its fiscal third quarter (July) compared to the prior year. Rising expectations for global GDP expansion, including Europe, Japan, and China, are also providing support for corporate growth plans even as the embattled White House’s pro-growth agenda may be on hold for the time being.
West Texas Intermediate crude, the North American benchmark, rose above $50 per barrel for the first time this month. Earlier in the week, Saudi Arabia and Russia committed to a 9-month extension of OPEC’s production freeze agreement ahead of its meeting next Thursday in Vienna. Although not a member of OPEC, Russia is the world’s largest crude oil producer; as such, its cooperation is essential to achieving OPEC’s objectives. In addition, the cartel is reportedly considering deeper production cuts in an effort to bring down global crude inventories. At the same time, U.S. shale producers have dramatically increased output by 465,000 barrels per day, or 5.4%, since September. The dueling dynamic has led some analysts to posit that any agreement by OPEC and Russia would merely result in market share gains for North American producers with minimal impact on oil prices. This analysis, though, overlooks the role of oilfield service providers that have had to accept significant discounts for their services over the past two years. As activity levels improve, we anticipate that pricing for these services will rise, and push oil prices higher as a result. The sector, which has lagged the broader market thus far this year, remains poised for gains as the industry recovery unfolds.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
- The pace of new home construction took a step back in April, according to the Census Bureau. Housing starts, housing completions, and the number of building permits each lagged in volume compared to March. The annualized rate of housing starts in April was 2.6% below the March total. Privately owned housing completions were 8.6% below the revised March estimate. And the number of building permits issued in April for all residential housing units was 2.5% behind March's total. However, compared to a year ago, housing starts (+0.7%), housing completions (+15.1%), and building permits issued (+5.7%) are ahead of their respective totals from April 2016.
- According to the Federal Reserve, industrial production advanced 1.0% in April for its third consecutive monthly increase and its largest gain since February 2014. Manufacturing output rose 1.0% for the month following a 0.4% decline in March. The indexes for mining and utilities posted gains in April of 1.2% and 0.7%, respectively. However, capacity utilization for the industrial sector increased 0.6 percentage point to 76.7%, a rate that is 3.2 percentage points below its long-run average. Nevertheless, total industrial production in April was 2.2% above its year-earlier level.
- In the week ended May 13, the advance figure for seasonally adjusted initial claims was 232,000, a decrease of 4,000 from the previous week's unrevised level of 236,000. The advance seasonally adjusted insured unemployment rate remained at 1.4% for the fifth consecutive week. For the week ended May 6, there were 1,898,000 receiving unemployment insurance, a decrease of 22,000 from the previous week's revised level. This is the lowest level for insured unemployment since November 5, 1988, when it was 1,898,000.
Eye on the Week Ahead
The first-quarter GDP report based on updated information is released this week. The initial report in April revealed lackluster economic growth for the start of 2017. The latest figures on durable goods orders, which are included in the GDP computation, are also available this week. Both of these reports are good indicators of the relative strength of the economy through the first part of 2017.