Markets were mixed last week; small cap stocks gained while large cap stocks were essentially unchanged. Sectors which respond to economic growth, such as Energy, Industrials, and Financials, outperformed; conservative areas of the market, including many consumer stocks and Utilities, lagged. The performance variance reflects a “risk on” sentiment as investors view positively the prospects for tax reform and improving global economic conditions. Congressional leaders have promised to release the outlines for tax legislation this week; many expect that the plan would lower the top corporate rate from 35% to 20%. Meanwhile, the Organization for Economic Co-Operation and Development (OECD) provided its Interim Economic Outlook. The report highlighted ongoing improvements throughout the world, with all major economies contributing to growth. The Outlook reiterated its earlier forecast for 3.5% Global GDP growth in 2017, and increased by 0.1%, to 3.7%, its projection for 2018; the report reiterated that consumer spending and business investment will support U.S. GDP growth of 2.1% in 2017 and 2.4% in 2018. Also, euro zone manufacturing and services activity accelerated in September; rising employment and increased business confidence support a favorable regional outlook. Meanwhile, markets continue to largely ignore the standoff with North Korea amid a fresh round of sanctions and escalating rhetoric.
Source: Pacific Global Investment Management Company
Last week, the Federal Reserve announced its plan to initiate “balance sheet normalization” in October. The process would gradually unwind the Fed’s extraordinary accumulation of Treasury and mortgage-backed securities; the Fed will no longer reinvest proceeds as a portion of these holdings mature. Leading up to the event, some analysts were concerned about a repeat of the “Taper Tantrum” in 2013 which triggered a brief selloff in stocks. This time, though, markets remained stable; investors widely anticipated the announcement and, perhaps, viewed the decision as confirmation that the economy was sufficiently healthy to withstand the withdrawal of monetary stimulus. Fed officials also provided an updated interest rate forecast; the median projection shows one additional rate hike in 2017 (likely in December), three in 2018, and two in 2019 (down from three as of the June meeting). The slightly reduced rate outlook stems primarily from continued low rates of inflation. Recent signs of tightening labor markets, though, suggest that inflation may be on the rise. Moreover, strengthening business confidence could deliver wage growth that ultimately drives prices higher. The Fed also noted that recent hurricane activity will impact third quarter economic data, but “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”
Investors often view September as a historically negative month for stocks. They recall somewhat recent events such as the 9/11 attacks in 2001 when the S&P 500® declined 8%, the financial crisis in 2008 when the Index fell 9%, and the European debt crisis in 2011 when the Index lost 7%. In reality, though, the month is statistically insignificant; September returns have averaged -0.4% over the past thirty years, including fourteen years with positive returns. Growing optimism regarding economic growth will likely add to the “win” column this year; market strength, especially in small cap stocks, is an encouraging sign as we approach third quarter earnings season.
Source: Pacific Global Investment Management Company
Last Week's Headlines
- Despite strengthening in the labor market and modest economic growth, the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 1.00%-1.25%. In deciding to maintain interest rates at their current level, the Committee noted that inflation has remained below the FOMC's 2% target, and the likelihood that hurricanes Harvey, Irma, and Maria will affect economic activity in the near term. Nevertheless, the Committee indicated that rates could be increased at least one more time before the end of the year.
- Considering the impact of Hurricane Harvey, new home construction in August was solid. Building permits, a direct indicator of future construction, were up 5.7% in August over July, and 8.3% above August 2016. Privately owned housing starts fell 0.8% (still 1.4% above last year), while housing completions were down 10.2% from July, possibly reflecting the impact of Hurricane Harvey.
- Sales of existing homes fell in August for the fourth time in the last five months. Existing home sales, which include single-family homes, townhomes, condominiums, and co-ops, retreated 1.7% to a seasonally adjusted annual rate of 5.35 million in August from 5.44 million in July. Last month's sales pace is 0.2% above August, 2016, and is the lowest since then. According to the National Association of Realtors®, while demand for existing homes is steady, there continues to be a lack of inventory, which is driving prices higher. Total housing inventory at the end of August declined 2.1% to 1.88 million existing homes available for sale, and is now 6.5% lower than a year ago. The median existing-home price in August was $253,500, up 5.6% from August 2016 ($240,000). August's price increase marks the 66th straight month of year-over-year gains.
- Import prices rose 0.6% in August, the first monthly increase since a 0.2% jump in April. This marks the largest advance for import prices since the index rose 0.6% in January. Much of the price increase was due to a 4.2% rise in fuel import prices, which is the first such increase since February and the largest advance since January. Nonfuel prices expanded 0.3% in August, driven by a 3.9% jump in nonfuel industrial supplies and materials import prices. Export prices rose 0.6% in August following a 0.5% increase the previous month. The August advance was the largest monthly rise since the index increased 0.8% in June 2016. Nonagricultural export prices advanced 0.7% in August, which is the largest advance since May 2016. The rise in export prices was driven by expanding export prices for nonagricultural industrial supplies and materials.
- In the week ended September 16, the advance figure for initial claims for unemployment insurance was 259,000, a decrease of 23,000 from the previous week's revised level. Hurricanes Harvey and Irma impacted this week's initial claims. The advance insured unemployment rate remained at 1.4%. The advance number of those receiving unemployment insurance during the week ended September 9 was 1,980,000, an increase of 44,000 from the previous week's revised level.
Eye on the Week Ahead
September and the third quarter come to an end this week. The final figures for the second-quarter gross domestic product are released this week, as is the August report on consumer income and spending.