Healthcare Redo on pause….Moving on to tax reform

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

market close

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.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fed confirms economic strength as the markets shift focus to Fiscal Policy and Trumps pro-growth agenda

Stocks rose this week following the Federal Reserve announcement on Wednesday to increase interest rates for a second time in three months.  Fed Chair Janet Yellen, in communicating the rate decision, noted: “We have confidence in the robustness of the economy and its resilience to shocks”; and, “Many more people feel optimistic about their prospects in the labor market.”  The favorable assessment buoyed investor sentiment, especially for shares of small and mid-sized companies which outpaced large cap stocks.  At the same time, Treasury yields declined as the Fed remained committed to a “gradual” pace of future rate hikes; the “dot plot,” which captures the Fed’s interest rate outlook, was largely unchanged from the December meeting.  Broadly positive economic data further bolstered investor confidence; robust housing starts, in particular, signal accelerating strength in the economy and bode well for the construction, transportation, and building materials industries.  Meanwhile, measures of consumer confidence are near post-recession highs; as a sign that consumers are responding to the improved economic outlook, retail sales rose for a sixth consecutive month.

Since the financial crisis, the Fed has been the primary driver of market action.  Yet, this week’s monetary policy meeting was notably uneventful.  Even as Fed officials raised rates for only the third time in a decade, the market’s response was remarkably subdued; indeed, this week, in sharp contrast to the market’s anxiety over the December 2015 rate hike, stocks rose and bonds fell.  Why the seeming disregard for the central bank?  Investors have apparently shifted focus from monetary policy to fiscal policy, that is, to Congress and the new administration’s pro-growth agenda.  These developments will likely dominate market action in 2017; healthcare, tax reform, regulations, infrastructure spending, trade, and immigration all present investment opportunities, as well as risks.  Certainly, with so many items on President Trump’s agenda, the main question is the extent to which the administration will be able to deliver on its many promises.  Nevertheless, the return to a market environment in which momentum will be determined mainly by developments in the real economy, rather than monetary policy, is yet another milestone in the economy’s long road to recovery since the Great Recession.

Over the last few weeks, growth-oriented stocks in areas such as transportation, industrials and energy, have sold off.  The recent action is most likely a pause after the significant post-election rally.  The Fed’s decision to increase interest rates, and the market’s reaction to that decision, provides confirmation of the economy’s strength.  Despite short-term negative movements in the markets, this positive outlook should provide a boost to these sectors over time irrespective of other benefits which may result from legislative action.

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

  • Not unexpectedly, the FOMC raised the target range for the federal funds rate by 25 basis points to 0.75%-1.00%. The Committee judged that a modest increase in the federal funds rate is appropriate in light of the economy's solid progress toward the Committee's goals of maximum employment and price stability. The decision to increase interest rates reflects the Committee's view that waiting too long to scale back some accommodation could potentially require raising rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and push the economy into recession. Anticipating continued labor strengthening and inflation inching toward the Fed's longer-range target of 2.0%, two more rate increases are still in the offing over the remainder of 2017. Interestingly, in Chair Janet Yellen's prepared comments, she noted the Committee's economic projections as follows: the growth of the GDP is expected to be 2.1% this year and next and edge down to 1.9% in 2019; the unemployment rate would stand at 4.5% in the fourth quarter of this year and remain at that level over the next two years; and the median inflation projection remains at 1.9% this year, rising to 2.0% in 2018 and 2019.
     
  • In a sign of continuing inflationary pressure, consumer prices, retail sales, and producer prices each increased in February. Consumer prices edged up 0.1% in February, according to the latest report from the Bureau of Labor Statistics. Over the last 12 months, the CPI has risen 2.7%. The index was held down by declining energy prices (-1.0%), which partially offset increases in several indexes, including food, shelter, and recreation. The index less food and energy rose 0.2% in February, and has increased 2.2% for the 12 months ended February 2017. This was the fifteenth straight month the 12-month change remained in the range of 2.1% to 2.3%, which is in line with the Fed's longer-range target of 2.0% inflation.
     
  • Advance estimates of U.S. retail and food services sales for February 2017 were $474.0 billion, an increase of 0.1% from the previous month and 5.7% ahead of February 2016. Retail sales increased 0.1% from January, and are up 5.9% from last February. Gasoline stations sales were up 19.6% from February 2016, while nonstore (internet) retailers' sales jumped 13.0% over last year. Conversely, restaurant and bar sales fell 0.1% for the month.
     
  • Producer prices for goods and services increased 0.3% in February, following a 0.6% increase in January. The price index climbed 2.2% for the 12 months ended February 2017 — the largest advance since a 2.4% increase in the 12 months ended March 2012. Prices less foods, energy, and trade services rose 0.3% in February, the largest increase since a 0.3% advance in April 2016. For the 12 months ended in February, the index less foods, energy, and trade services climbed 1.8%.
     
  • New construction in the housing market picked up in February. Housing starts rose 3.0% for the month compared to January, and are 6.2% above the February 2016 rate. Single-family housing starts in February were 6.5% above the revised January figure. Housing completions also surged in February, climbing 5.4% above the revised January estimate and 8.7% ahead of the February 2016 pace. On the other hand, permits for new residential construction were off, down 6.2% in February from January but still 4.4% ahead of the February 2016 estimate.
     
  • The Job Openings and Labor Turnover Survey(JOLTS) offers information on monthly changes in the number of job openings, hires, and quits. The latest information for January reveals that there were 5.6 million job openings on the last day of January — about 87,000 more openings than December. There were 5.4 million hires in January, roughly 137,000 more than December. The number of total separations, including quits, layoffs, and discharges, (otherwise known as "turnover") increased by 174,000 in January compared with December. Over the 12 months ended in January, hires totaled 63.1 million and separations totaled 60.7 million, yielding a net employment gain of 2.4 million.
     
  • The Federal Reserve's index of industrial production shows how much factories, mines, and utilities are producing. Industrial production was unchanged in February following a 0.1% decrease in January. However on a positive note, manufacturing output moved up 0.5% for its sixth consecutive monthly increase. Manufacturing gains occurred in business equipment and auto production. Mining output jumped 2.7%, but the index for utilities fell 5.7%, as continued unseasonably warm weather further reduced demand for heating. Capacity utilization for the industrial sector declined 0.1 percentage point in February to 75.4%.
     
  • In the week ended March 11, the advance figure for seasonally adjusted initial unemployment insurance claims was 241,000, a decrease of 2,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended March 4 was 2,030,000, a decrease of 30,000 from the previous week's revised level.

 

Eye on the Week Ahead

This week should see equities markets settle following the Fed's decision last week to increase interest rates for the first time this year. February's figures on sales of existing and new homes are available this week. Orders for durable goods have been volatile at best. Not much change is expected in the manufacturing sector when February's numbers are released at the close of this week.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Markets are pausing to check in with the Fed this week….90+% chance of an interest rate increase

Declining oil prices weighed on the markets this week; West Texas Intermediate crude, the North American benchmark, fell 9% to drop below $50 per barrel for the first time this year.  Record U.S. inventory levels, partly due to scheduled refinery maintenance, but also a result of increased production, contributed to the pullback.  At an industry conference this week in Houston, Saudi officials, who would prefer an oil price increase to $60 per barrel or higher, told several U.S. producers not to assume that OPEC would automatically extend its production freeze agreement in May.  The comments highlight increased anxiety among global oil producers which must contend with a revitalized U.S. energy sector.  Indeed, the shale industry’s competitive positioning strengthened during the OPEC-induced bear market from 2014-2016; shale oil companies reduced break-even costs while industry consolidation benefitted the strongest and most technologically advanced producers.  President Trump’s promise to reduce energy-related regulations has further encouraged oil company executives to pursue aggressive growth strategies.  As a result, oil prices in the near-to-medium term are likely to remain within a range of $40 and $60 per barrel, a level which should support robust U.S. energy services activity; stocks, though, may remain somewhat volatile as investors respond to periodic production and inventory data.

The February jobs report confirmed the health of the U.S. economy and all but assured a Federal Reserve rate hike next week.  Total non-farm payrolls grew by 235,000, while the unemployment rate declined 0.1% to 4.7%.  The “U-6” unemployment rate, which includes discouraged or part-time workers who would prefer a full-time position, fell to 9.2%; the metric, favored by Fed Chair Janet Yellen, is near pre-recession levels and down from a peak of 17.1% during the financial crisis.  Meanwhile, labor force participation (the percentage of the population that is working or actively seeking work) rose 0.1% to 63.0%, as 340,000 eligible employees entered the workforce, the biggest improvement since July 2016.  The increase suggests those seeking employment are feeling more hopeful about their job prospects; the reading also points to rising business confidence and expanded hiring plans.  Wage growth remains somewhat muted despite the strengthening labor market; average hourly earnings rose 0.2% compared to January, and 2.8% year-over-year.  Still, continued job creation will eventually lead to stronger wage gains which will, in turn, support consumer spending, the main driver of economic growth.  Thus, the recent pause in stock prices is unlikely to presage a larger correction; positive economic data should support improving corporate performance and sustain the market’s positive bias.

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

  • A real market mover, the monthly employment report can influence not only investors, but short-term interest rates as well. February's report was very positive on a number of fronts. Job growth continued as 235,000 new jobs were added last month with job gains in construction, private educational services, manufacturing, health care, and mining. The unemployment rate dipped to 4.7% as both workforce participation and employment increased. The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in February. But in a further sign of continued economic strengthening, payrolls increased by $0.06 to $26.09, following a $0.05 increase in January. Over the year, average hourly earnings have risen by $0.71, or 2.8%. This report should encourage investors as well as the Fed, which is likely to raise short-term interest rates.
     
  • For February, the federal deficit was $192 billion. January showed a monthly budget surplus of $51 billion. The February deficit is essentially the same as the February 2016 deficit. Through the first five months of the fiscal year, the deficit sits at $349 billion. The deficit over the same period last year was $351 billion.
     
  • The trade deficit is growing, according to the Census Bureau's final report for January. The goods and services deficit was $48.5 billion, up $4.2 billion from $44.3 billion in December. January exports were up $1.1 billion to $192.1 billion. January imports were $240.6 billion, $5.3 billion more than December imports. Year-over-year, the goods and services deficit increased $5.1 billion, or 11.8%, from January 2016. Exports increased $13.3 billion, or 7.4%. Imports increased $18.4 billion, or 8.3%.
     
  • Export prices actually outpaced import prices in February, according to the Bureau of Labor Statistics. Prices for U.S. exports advanced 0.3% in February and have not recorded a monthly decline since the index fell 0.8% in August. Export prices increased 3.1% over the past 12 months, the largest over-the-year rise since the index advanced 3.6% between December 2010 and December 2011. Import prices rose for the third consecutive month in February, increasing 0.2%, after a 0.6% advance in January and a 0.4% rise in December. The price index for imports also rose over the past year, increasing 4.6%. That rise was the largest 12-month advance in import prices since a 5.1% increase in February 2012.
     
  • In the week ended March 4, the advance figure for seasonally adjusted initial unemployment insurance claims was 243,000, an increase of 20,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended February 25 was 2,058,000, a decrease of 6,000 from the previous week's revised level.

 

Eye on the Week Ahead

This week provides several important reports, including information on consumer prices, producer prices, and retail sales — each of which offers guidance on inflationary trends. The latest report on industrial production is also available at the end of the week. However, investors will be watching the results of this week's FOMC meeting, as indications are that the Committee will increase the federal funds target rate for the first time in 2017.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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