Week Ending 7/1/2017

Summary

Notable Market Headlines

Stock markets around the world closed the week with minimal changes overall. Large U.S. stocks were lower by -0.6% while small U.S. stocks were unchanged. The NASDAQ Composite, generally a measure of the performance of technology and other high-growth stocks, saw its biggest one-day gain. This big daily gain was then followed by a sharp loss the next day and spike higher in volatility.

The performance of many of the market’s leading stocks, many in the NASDAQ index, is a developing story. Clearly the willingness of investors to blindly buy these high-growth stocks with the seeming expectation of continued growth indefinitely has subsided. This has fueled more speculation by some market-watchers that the stock market is running out of momentum. This is speculation that has come and gone many times in the past and will only be known when more time has once again passed.

International stocks also saw little change for the week with developed country stocks +0.1% and emerging market stocks down -0.3%. These markets have done very well during the first half of the year with developed country stocks up +12.9% and emerging markets up +18.4%. Both are coming of multiple disappointing recent years of performance.

The big mover higher this week was Commodities gaining +5.5% as the price of oil rallied for 5 consecutive days. Although commodity prices are lower year-to-date, this week’s performance demonstrates they can be a great diversifier in a portfolio. Real estate and gold, two other great portfolio diversifiers, were both lower for the week by -1.2%.

Bond yields neared 2017 lows mid-week then moved higher resulting in the price of bonds closing down for the week by -0.5%. The expectation that the Federal Reserve will raise interest rates further this year as well as central banks around the world pulling back economic stimulus efforts is believed to eventually put further downward pressure on bond prices.

Investor Trivia Question

The Dow Jones Industrial Average, a measure of large U.S. stock performance, gained +7.7% during the first half of the year. Given this gain, are the odds higher or lower that the second half of the year will be profitable for investors?
See below for answer.

Winners and Losers by Sector

Stock Highlights

Nike Inc. (NKE), the giant sports apparel company, reported better than expected sales and earnings for the quarter pushing its stock higher by +11.6% for the week. The company has been feeling competitive pressures in the market, for example, with its share of the athletic footwear market dropped to 34.7% from 35.9% a year ago. The company also announced plans to sell direct to Amazon, a major shift in its distribution strategy, and set a goal to have $50 billion in annual revenue by 2020.

Nike has been a huge success for long-term investors as the graph below demonstrates for the last decade. Nike became a public company in January 1981 and is higher by more than 50,000% as compared to the S&P 500 gaining 1,770% during the same time!

Banking stocks rallied on news that all 34 banks passed the Federal Reserve’s stress test. This test simulates two scenarios including one similar to the crisis in 2008. It is expected the banks would experience substantial losses but would survive such an environment. Bank stocks rallied with the following notable winners:

There was a much welcomed rally for energy stocks in the price of oil that…

Technology stocks faced some aggressive selling by investors as concerns loom as to whether many of these stocks have rallied too far too fast during the past several months. Computer chip stocks were among the biggest losers including:

The above stocks all remain higher year-to-date by double digits.

Arconic (ARNC), the metals and manufacturing company formerly known as Alcoa, saw its stock fall -11.3% on news that it could potentially be responsible for the apartment tower fire in London recently. One of the company’s products was used in the construction of this tower that is has now said it will no longer sell for that use regardless of local building codes and regulations. In spite of the week’s decline the stock remains higher by +22.2% year-to-date.

Economic Indicator - Reported

Durable goods orders, orders for such things as aircraft and vehicles, for May fell -1.1%, nearly triple the decline forecast by economists. Excluding the volatile transportation component of this report, orders were higher by +0.1% rebounding from a decline last month. Compared to a year ago orders are higher by +2.7%.

Housing prices inched higher by +0.3% in the most recent month, a welcomed continuation of the upward trend but only half the gain estimated by economists. There is some weakness creeping into some regions with both San Francisco and Boston experiencing declines, down -0.6% and -0.7% respectively. Below is a graph representing the long-term trend in housing prices.

Source: https://fred.stlouisfed.org/series/CSUSHPINSA

The third revision to Gross Domestic Product (“GDP”) for the first quarter showed the economy growing at a +1.4% rate as compared to the previously reported +1.2%. Estimates for the second quarter suggest a growth rate of more than double the first quarter.

Economic Indicators – Upcoming

The Employment report, for June, including the number of jobs added or lost for the month as well as the current unemployment rate, will be released. Economists estimate that employers added 170,000 new jobs, up from 138,000 last month, and that the unemployment rate will hold steady at a very low 4.3%.

There will be two reports providing an update on the manufacturing sector including the PMI Manufacturing Index and a separate report of Factory Orders for May. Factory orders, a combination of both durable and nondurable goods orders, are expected to have fallen by -0.6% which would be the second month in a row.

Investor Trivia ANSWER

Given the first half being higher for the Dow Jones only slightly raises the odds that the second half will be higher too. Going back to 1929 the Dow has been higher during the first half of the year 54 times of 88 years. The second half of the year has been higher 67% of the time with those odds going to 74% when the first half has been positive. If history is any indication, which I’m not sure it really is here, this bodes well for investors in 2017.

Source: Patton research

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