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Week Ending 8/12/2017


  • Markets were down around the world with small U.S. stocks feeling some of the most pain
  • Defense stocks rallied as tensions with North Korea heighten
  • Inflation remains below the Federal Reserve’s desired level

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

Stocks moved lower in all markets around the world with the finger being pointed at tensions surrounding North Korea as the reason for the declines. Some portfolio diversification helped mitigate some of the losses with the price of gold rallying, as it often does during such market environments.

Large U.S. stocks were off -1.3% and remain higher by +9.2% year-to-date, still a very impressive performance. Small U.S. stocks did not fare as well falling -2.7% for the week and are now only higher by +1.2% year-to-date. It was a broad-based selloff with nearly every sector moving lower. Of the 500 stocks in the S&P 500, losers outnumbered winners by a ratio of 4 to 1.

International stocks weathered the week no better than U.S. stocks with developed markets off -2.2% but still higher by +14.2% year-to-date. International emerging markets gave back some of their 2017 gains with a drop of -2.3% for the week. One of the notable emerging markets falling the most was India’s market down -4.4%. As is the case with nearly every emerging market, this week’s declines only dented the year-to-date performance with India’s market still higher by a very impressive +25.8% in 2017.

The difference in returns year-to-date for the various equity markets is relatively significant. The below graph shows those year-to-date returns in gray. For example, U.S. small stocks are only higher by +1.2% while international emerging markets have gained +22.6%. Interesting though when you look at a slightly longer period of time, the past 12 months from mid-August 2016 through today, the returns are much more similar. For example, U.S. large and small stocks have performed identically, both up +11.7%, and emerging markets are up +14.5%.

Source: S&P Compustat

There’s an important lesson to be learnings from the above graph. Although the returns over longer periods of time are often very similar, as they are during the past 12 months, they can be very different during shorter periods of time. Maintaining diversification across all of these markets helps smooth the returns of a portfolio resulting in a lower overall risk profile for a portfolio but with the same strong long-term returns.

The performance of investments other than stocks was mixed. Real estate fell with stocks, down -2.1% for the week and in negative territory year-to-date by a similar amount. Gold was the shining star this week, gaining +2.6%. A rally in the price of gold is relatively common during times of fear in the markets as well as during periods of rising inflation. Year-to-date gold is higher by +12.0%.

The price of commodities edged lower, declining by -0.6%, holding up better than stocks as the decline in the price of oil subsided. This is a good demonstration of the fact that the price of commodities often do not move in lockstep with stocks and provide some diversification value in a portfolio.

Bonds gained +0.2%. A low read on inflation has lowered the expectation that the Federal Reserve will raise interest rates as soon as has been expected.

Winners and Losers by Sector

Source:S&P Compustat

Stock Highlights

Michael Kors Holdings (KORS), a $4+ billion in sales designer and retailer of fashion goods, reported earnings that were well above estimates pushing its stock higher by +21.4% for the week. In spite of this big gain, the stock is up only +4.0% YTD. As the accompanying graph shows, his stock has struggled mightily falling from an all-time higher just shy of $100 in early 2014 to a low in the last 30 days of $33. Some Wall Street analysis are optimistic that this company can continue its recovery with one catalyst being its recent purchase of luxury shoe retailer Jimmy Choo.

Source: www.yahoo.com/finance

Defense stocks rallied this week as tension with North Korea continue to heighten. Following are the three biggest companies in the industry:

Source:S&P Compustat

Clearly these defense stocks, along with many others in the industry, have had a strong performance in 2017 but this is NOT a new trend. These defense stocks have been rallying for multiple years, as the below graph illustrates, dramatically outpacing the performance of the S&P 500. Another good lesson to learn from this graph is how similarly stocks in the same sector often perform.

Source: www.yahoo.com/finance

J.C. Penney (JCP), once a leading retailer, has seen its stock decimated with this week being another very rough one for shareholders. The company reported very disappointing sales and earnings results driving its stock down -27.8% for the week to a multi-decade low. It is now trading below $4 after being in the upper $80’s about a decade ago. The company has struggled with decline sales and significant losses that some Wall Street analysts are suggesting will put the company out of business eventually.

Economic Indicator - Reported

The Consumer Price Index (CPI) came in below expectations with a gain of +0.1% for the month resulting in a year-over-year gain of +1.7%. This year-over-year gain is below the Federal Reserve’s target of 2% and could have some impact on interest rate policy. Some notable goods and services seeing decline prices include:

  • Vehicle prices: -0.5%
  • Lodging prices: -4.2%
  • Wireless service (cell phone) prices: -0.3% and -13.3% for the past 12 months

The Produce Price Index (PPI) was weaker than the CPI falling -0.1% for July as compared to economists’ estimate of a gain of +0.1%.

Second quarter productivity improved by +0.9% indicating a higher level of output given the number of hours worked by employees and the wages paid to them. That said, the report is considered to be relatively soft but was on the better side of the zero line.

Economic Indicators – Upcoming

Retails sales for July are expected to have increased by +0.3%. This would be a significant rebound from June’s disappointing drop of -0.2%. Retail sales are an important barometer for the economy given that consumer spending tends to make up about two-thirds of economic activity. This will be one of the first big looks at how well the economy started the second half of the year.

July Housing Starts are expected at a 1.225 million annual rate, a modest gain compared to June’s report. This is a volatile number and subject to often large revisions in prior reports. It is important given its impact on the overall economy.

Leading Indicators, a composite of 10 indicators attempting to provide some outlook for the economy for the next six months, is expected to have gained +0.3% in July following a strong June report.

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