Week Ending 8/19/2017

Summary

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

Notable Market Headlines

Stocks were mixed around the world demonstrating, as is very often the case, the value of a well-diversified portfolio. While U.S. stocks fell for a second week in a row, international stocks turned in relatively strong performance.

U.S. large stocks declined -0.6%. The week’s performance included one day when the Dow Jones Industrial Average fell -274 points making it the biggest daily decline in a few months. The sector facing the biggest declines was energy with those stocks down -2.4% as the price of oil retreated. Small U.S. stocks faced bigger declines off -1.1%. As the graph below shows, small U.S. stocks were hot immediately following the election of President Trump, outpacing large stocks initially by a wide margin that has now entirely disappeared.

Source: www.yahoo.com/finance

International stocks performed well for the week with developed country stock higher by +0.4%. Emerging market stocks did even better with a gain of +1.7% for the week. International stocks not only did better than U.S. stocks this week but have far outpaced them year-to-date with U.S. large stocks higher by +8.6% while developed country stocks are up +14.7% for the year and emerging markets have surged +24.7%. The graph below shows some of the emerging markets that have had the best performance so far in 2017.

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

The non-traditional, or alternative, asset classes we monitor did little to help performance for the week. Commodities continue to be the biggest disappointment for the year, down -8.8% year-to-date following the week’s decline of -0.4%. Real estate has also had disappointing year-to-date performance of -2.1% and was down just -0.1% this week. Gold though has been a good performer with gains of +11.6% in 2017 in spite of a small decline this week of -0.4%.

Bonds closed unchanged for the week but did experience some volatility. Minutes from the Federal Reserve’s most recent meeting suggested there is disagreement as to when to next raise interest rates. This resulted in bond prices falling temporarily but then recovered when the stock market faced some volatility and investors flocked to bonds for some safety.

Winners and Losers by Sector

Source:S&P Compustat

Stock Highlights

Wal-Mart (WMT), the massive retailer, reported quarterly results ahead of Wall Street expectations. Sales for the quarter came in at $117.5 billion with same-store sales gaining 1.4%. For some perspective, Wal-Mart sales are about 3 times Amazon’s. Earnings were $1.00 per share or 4 cents ahead of estimates. Online sales surged 63% as compared to growth at half that rate in the prior quarter. In spite of this good report, its stock was down -1.4% for the week but higher by 14.7% year-to-date.

Foot Locker (FL), a retailer of athletic apparel, saw its stock drop -30.2% for the week and has now lost more than half its value in 2017. The company’s second quarter results disappointed investors with earnings missing forecasts by about 35% on lower than expected revenue. Wall Street analysts downgraded their ratings on this stock. Under Armour (UAA) and Nike (NKE) fell in sympathy with Foot Locker, down -7.7% and -6.8% respectively for the week.

Utility stocks often do not get a lot of attention from investors and tend to have less volatile stock prices than other sectors. That said, they were on the move higher this week helped by billionaire Warren Buffett’s bid to purchase Texas utility Oncor. Nearly every stock in the sector bucked the overall market’s loss with some notable winners including:

It has been more than just one week of strong performance. Year-to-date many of these stocks are up double-digits and outpacing the market following strong performance by many of these company in 2016 as well.

Economic Indicator - Reported

Retail sales grew in July by +0.6%, double the rate economists had forecast, with strength across many sectors. Not only was July very strong but the weak report for June, initially showing a decline of -0.2% was revised to a gain of +0.3%. This is a stark reminder to investors that many economic reports can be revised from the initial estimate.

Industrial Production, a broad measure of the economy’s output, was higher by +0.2% in July. This was a disappointment when compared to an estimate of +0.3%. Among other things, the report showed a decline in the manufacturing sector as motor vehicle production declined for the third straight month down -3.6% in July.

Other reports for the month including Housing Starts coming in below expectations. A big surprise was a surge in Consumer Sentiment coming in well ahead of economists’ forecasts. There was a warning in the report that this report does not fully reflect the violence that took place in Virginia which could have an impact on sentiment.

Economic Indicators – Upcoming

Economists are forecasting a sharp decline in Durable Goods Orders in July of -5.8% but excluding the volatile transportation sector orders are expected to have grown by +0.4%. If the report comes in as expected, it could fuel some optimism about the second half of the year for the manufacturing sector of the economy.

We will get two reports on the housing market including the New Home Sales report expected to show sales of 610,000 homes in July, the same pace as the prior month and improved compared to earlier in the year. Existing home sales in July are expected to come in at an annualized rate of 5.565 million homes. This would be up slightly from the prior year.

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