Week Ending 7/8/2017

Summary

Notable Market Headlines

Large U.S. stocks were the only major asset class posting a gain for the week, up a scant +0.1%. Of the 500 stocks in the S&P 500 index, it was nearly dead even between winners and losers with 256 moving higher and 244 lower.Small U.S. stocks closed down a fraction at -0.3%.

The movement among the various sectors of the U.S. stock was a little more interesting as technology stocks gained +0.6% after having fallen more than -6% from highs about a month ago. As the graph below illustrates, the technology sector remains the leader year-to-date with healthcare stocks a very close second. Energy stocks, are the clear laggards as the price of oil has fallen meaningfully from the start of the year and moved lower again this week after a brief and strong recent rally.

The price movement in the international markets was little different than in the U.S. this week. International developed markets and international emerging markets were both down -0.6%. One notable exception was the gain in the India market by +1.5% and now higher by +24.8% year-to-date.

Commodities were last week’s biggest gainer and among this week’s biggest loser down -2.1% for the week. This is all about the price of oil which moved lower this week in spite of an expected drop in inventories which drove a brief rally. Gold fell a similar amount, down -2.3%, and real estate was off -1.5%. Commodities and real estate have been the biggest disappointments this year with both in negative territory.

Bond prices fell this week by -0.6% and are now higher by just +0.7% year-to-date. Lower prices are pushing yields higher which puts downward pressure in other areas of the market including real estate stocks which are often bought for their high yields. The lower prices and higher yields come as investors continue to digest the likely reality of central banks dialing back economic stimulus as the world economy continues to strengthen.

Investor Trivia Question

Volatility in the market, or the change in prices from one period to the next, is near record lows. This has captured the attention of some market watchers creating concern that this may be the calm before the storm.

Although low volatility is common during bull markets when prices are rising, it has fallen to relatively extreme levels. How far below its 10-year average is the volatility of large U.S. stocks?
See below for answer.

Winners and Losers by Sector

Stock Highlights

Most of the newsworthy stock moves this week were unfortunately for those moving lower. There were though two groups of stocks that did see some positive movement including airline stocks. Airlines benefit as one of their biggest costs, fuel (oil), goes down in price. Some notable winners this week included the following:

The other group, as noted earlier, was technology stocks. There have been some big swings in prices for many tech stocks during the past month. The graph below shows some of the biggest winners this week (blue bars) accompanied by their price move the prior week (green bars). All of these stocks were only gaining back a fraction of their recent losses.

O’Reilly Automotive (ORLY), a multi-billion-dollar auto parts company, saw its stock fall -21.0% this week following its earnings report. The company said same-store sales grew by +1.7% but this was well below Wall Street expectations of growth in the +3% to 5% range. The company said weather was one factor impacting sales. This disappointing report drug down the prices of its competitors’ stocks as well with Advanced Auto Parts (AAP) down -12.6% and Autozone (AZO) lower by -12.1%. O’Reilly’s stock is now down -37.9% year-to-date.

Tesla (TSLA), the electric car company, was off -13.4% for the week and more than -18% from its high just a few weeks ago. There is a variety of news taking its toll on this stock including reports that safety testing of its Model S did not go as well as expected. This is a closely watched stock that has performed exceedingly well the past 5 years, up more than 10 TIMES, but has experienced declines along the way of a similar magnitude multiple times. In spite of the recent selloff, the stock remains higher by +46.6% year-to-date.

Economic Indicator - Reported

The June U.S. employment report came in stronger than expected showing job gains during the month of 222,000 as compared to an estimate of 170,000. In addition to the strong June, there were positive revisions to prior month reports as well. The unemployment rate did tick higher by +0.1% to 4.4% but is still considered very low. Confounding economists is the lack of significant upward pressure on wages which were higher by just +0.2%.

A couple of reports providing reads on the manufacturing sector were somewhat mixed. The PMI Manufacturing Index remains relatively strong but did indicate a slowdown in orders and output. A separate report of Factory Orders for May showed a decline of -0.8%, more than had been expected, was negatively impacted by larger-ticket items.

Economic Indicators – Upcoming

This week we get two reports on inflation, both the Consumer Price Index (CPI) and the Producer Price Index (PPI). Both are expected to show little or no upward pressure on prices throughout the economy which is believed to make it more difficult for the Federal Reserve to continue raising interest rates.

June Retail Sales are estimated to have grown +0.1% being held back by vehicle sales. Excluding autos and gas, the report is expecting to show more impressive growth of +0.4%.

Industrial Production, one of the broadest measures of the economy, is expected to show a gain of +0.3%.

Investor Trivia ANSWER

U.S. large stock volatility is current 66% BELOW its 10-year average near record lows. It is common for volatility to be low during bull markets such as we are experiencing. Every type of investment, as the accompanying graph shows, is experiencing volatility that is well below its average including Commodities, as an example, which have been more in a bear market when you would expect higher volatility.

Sources:Patton research, S&P Compustat

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