The markets declined last week as the focus on health care reform weighed on investor sentiment. Many had viewed the administration’s early efforts on the American Health Care Act, the replacement for Obama’s Affordable Care Act, as potentially delaying pro-growth initiatives, most importantly tax reform and an infrastructure package. The White House’s push for a Friday vote in the House of Representatives set the stage for a transition to other, more popular, items on the President’s agenda. Ultimately, though, the bill was pulled from consideration due to a lack of votes. Still, the President’s determination to move forward with growth-oriented policies is a positive signal for stocks and the economy. Investors had begun voicing concerns that further delays would undermine the post-election market rally; now, a renewed impetus for these important initiatives may well support business and investor confidence, and help recapture market momentum. Elsewhere, British Prime Minister Theresa May confirmed plans to invoke Article 50 on March 29th; the move to initiate the process of exiting the European Union will lead to vigorous debate across Europe. Certainly, the future of the EU will play out over the course of critical elections in France, Germany, and the Netherlands.
Interest rates, meanwhile, declined due to the uncertainty over health care reform as well as a reduced outlook for inflation as oil prices declined. West Texas Intermediate crude, the North American benchmark, fell below $50 per barrel on March 8th as inventory levels and drilling rig activity increased. The Energy Information Administration’s (EIA) Petroleum Status Report showed that crude oil in storage grew by 5 million barrels this week, significantly outpacing analysts’ estimates of a 2.8 million barrel increase. The EIA, though, noted that overall inventories remain within the expected range for this time of year; storage levels typically increase prior to the peak summer driving season as refiners undergo maintenance during the spring. At the same time, the recent rise in rig counts may overstate prospective production increases. The sharp increase in the number of drilled but uncompleted wells suggests that rig activity may not necessarily correspond with higher output; rather, producers are likely preparing wells for activation once oil prices sustain a level sufficient for acceptable economic returns. Our conversations with oil company executives suggest that oil prices closer to $60 per barrel would be necessary for substantial production growth.
Companies have entered a quiet period ahead of the first quarter earnings season which begins on Tuesday, April 4th. The market’s focus over the near-to-medium-term will likely include the legislative process in Washington as Congress addresses corporate tax reform, the upcoming earnings releases, and overseas developments related to Brexit and the European elections.
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
- At first blush, it appears that orders for manufactured durable goods have been strong in both January and February. However, a closer look at the latest Census Bureau report reveals that durable goods orders for core products have been slow. Overall, orders for durable goods increased 1.7% in February following a revised January increase of 2.3%. Much of the gain the past two months has been attributable to transportation, particularly aircraft sales. New orders for durable goods orders excluding transportation increased only 0.4% in February. New orders for core capital goods, which exclude defense and aircraft, actually decreased 0.1% for the month, which is indicative of continued weakness in business investment.
- A dwindling supply of affordable housing has stunted the sales pace of existing homes in February. Total existing homes sales (including single-family homes, townhomes, condominiums, and co-ops) fell 3.7% to an annual rate of 5.48 million in February, down from 5.69 million in January. Despite the drop-off, February's sales pace is still 5.4% above a year ago. Total housing inventory at the end of February increased 4.2% to 1.75 million existing homes available for sale, which is 6.4% lower than a year ago (1.87 million) and has fallen year-over-year for 21 straight months. Unsold inventory is at a 3.8-month supply at the current sales pace (3.5 months in January). The median existing-home price for all housing types in February was $228,400, up 7.7% from February 2016 ($212,100). February's price increase was the fastest since last January (8.1%) and marks the 60th consecutive month of year-over-year gains.
- Unlike existing home sales, new home sales surged in February. Sales of new single-family houses in February were at a seasonally adjusted annual rate of 592,000, which is 6.1% higher than the January sales rate of 558,000. New home sales are 12.8% above the February 2016 estimate. The median sales price of new houses sold in February was $296,200, down about 4.0% from January's median sales price of $308,200. The average sales price was $390,400, which is almost 10.0% higher than January's average sales price of $355,300. The seasonally adjusted estimate of new houses for sale at the end of February was 266,000. This represents a supply of 5.4 months at the current sales rate, which is down from January's supply of 5.6 months.
- In the week ended March 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 258,000, an increase of 15,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate dipped to 1.4%. The advance number for seasonally adjusted insured unemployment during the week ended March 11 was 2,000,000, a decrease of 39,000 from the prior week's revised level.
Eye on the Week Ahead
The final report on the fourth-quarter GDP is released this week. The prior reading showed the rate of economic growth to be 1.9%. This week's final returns are expected to show little change.