Week Ending 6/17/2017

Summary

Notable Market Headlines

The big event for the markets this week was the Federal Reserve’s decision to raise interest rates by another quarter of a percent to a target range of 1.0% - 1.25%. Although this is significant for the market and economy, it came as no surprise to investors and the announcement had little impact, if any, on prices. Most importantly, the Fed did say it plans to do another rate hike later in the year assuming the economy remains healthy.

All that said, stocks were generally lower around the world mostly due to what appears to be some follow-through that started late in the prior week. U.S. stocks were lower across the board with large U.S. stocks down -0.3% and small U.S. stocks off -1.0%. Technology stocks continued under some higher than average pressure losing -1.2% for the week while financials, healthcare, consumer goods, and industrials gained +0.5% or more.

Stocks in international developed countries held their ground with a small gain of +0.1% while international emerging markets were off -0.9%. Again, the worst performing emerging market was Russia with a loss of -3.2% for the week and now down -15.2% year-to-date. Surprisingly, in spite of what appears to be a friendly posture from President Trump towards Russia and an early surge in Russia’s market, it has since reversed course and is the worst performer since the election as the below graph shows.

The price of oil continued its decline pushing the Commodity index down -1.4% for the week and adding to its 2017 losses. Gold also dropped -1.0% but maintains healthy gains for the year.

Real estate was the standout winner up +0.9% for the week. Real estate stocks are often bought for their high dividend yields suggesting that the Fed raising interest rates would put downward pressure on these stocks. Although this logic is sound historic performance does not tend to support it.

Bond prices, most directly impacted by the Fed’s decision, were higher by +0.4%. Again, though, as interest rates go higher it is expected that bond prices will have downward pressure.

Investor Trivia Question

Standard & Poor’s released an update of its mutual fund research called its Persistence Scorecard this week. As they note in the report, one of the key measurements of success for active management, those mutual funds where a manager or team of managers is actively picking securities in an attempt to do better than their competitors, lies in their ability to deliver above-average returns consistently over multiple time periods.

According to S&P’s research, of the 568 mutual funds that were in the top 25% of performers in the first quarter 2015, how many were still in the top 25% in the first quarter 2017?

See below for answer.

Winners and Losers by Sector

Stock Highlights

Amazon (AMZN) announced plans to purchase grocer Whole Foods (WFM) for $13.7 billion. This announcement came on Friday morning at a price for Whole Foods that was 27% above its closing price the day before causing its stock to surge. This acquisition would allow Amazon to quickly expand its online purchasing and home-delivery business in the all-important grocery segment.

This announced deal not only drove Whole Foods stock higher by 29%, Amazon’s gained 2.4% while other competitors experienced sharp selloffs. The biggest percentage loser was Kroger (KR) down -9.2% on Friday and -27.6% for the week. When instead measured by the value of the company, Walmart (WMT) was the biggest loser down -$13.4 billion in value on Friday.

It is possible that other bidders step in for Whole Foods including Walmart. Amazon would be a tough company though to get in a bidding war with given is $21.5 billion cash position as of the most recent quarterly report. Walmart, for example, had cash of $6.5 billion at the end of the most recent quarter.

Tax preparer H&R Block (HRB)gained +14.2% this week after reporting strong earnings and raising its dividend payment. This stock is up +30.1% year-to-date recovering from a touch year in 2016.

Steel giant Nucor Corp (NUE) announced guidance for its second quarter earnings that disappointed investors. The company said earnings in the second quarter would come in below first quarter results but still higher than they were during the same period last year. The stock fell on the news by -8.1% for the week. Unrelated, the U.S. government is considering tariffs on imported steel that would be welcome news for Nucor.

Economic Indicator - Reported

Inflation, as measured by the Consumer Price Index (CPI), notched a -0.1% decline in May, weaker than had been expected. Excluding food and energy, two more volatile components, prices inched higher by +0.1%. Year-over-year prices are higher by +1.9%, a trend that is beginning to move lower rather than higher as many had expected. This weakness in prices did not stop the Federal Reserve from raising interest rates but it could have an impact on the likelihood of future rate hikes by the Fed.

The Producer Price Index (PPI), a measure of wholesale prices, is showing slightly more upward pressure the consumer prices. The PPI was flat in May but +0.3% when excluding food and energy. The year-over-year trend is also stronger up +2.4%.

May Retail Sales were weak and well below economists’ forecasts coming in at -0.3% versus the forecast of +0.1%. This is a concerning report for the overall economy with retail sales weak in the first quarter and not improving in the second. In spite of the weak start to the year, retail sales are still +3.9% higher than the same period last year.

Creating further concerns about the economy is the weak manufacturing sector. As measured by Industrial Production, the industry was flat in May versus as estimate of +0.2%. One of the weaker segments was vehicle production down -2% and even manufacturing of high-tech goods was flat.

Note the frequent miss of economists’ forecasts versus the actual results. This is a common phenomenon especially when there are changes in the trends. Therefore, economists appear good a forecasting a continuation of what has recently been happening (anybody can do that) and not so good at seeing changes coming.

Economic Indicators – Upcoming

The economic calendar for the coming week is fairly quiet.

We will get reports on both Existing Home Sales and New Home Sales. Economists are expecting April’s slow sales to continue into May for existing home sales while new home sales are forecast to remain relatively healthy.

The May Leading Indicators report, a report that attempts to predict economic activity 6 months out, is expected to show continued improvement.

Investor Trivia ANSWER

Of the 568 mutual funds in the top 25% of performers in the first quarter of 2015, only 1.94% of these funds remained in the top 25% in the first quarter 2017! This highlights the tremendous difficult of fund managers to produce consistent above-average performance and further builds the case the investors are served better by low-cost index funds.

Source: Does Past Performance Matter? The Persistence Scorecard, Standard & Poor’s, June 2017

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