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Week Ending 8/26/2017
- Markets were higher around the world with International Emerging Market continuing to lead.
- Durable goods orders indicated strong business spending and continued strength for the economy.
- U.S. stocks are only 1.5% off record high and volatility subsided after spiking higher in prior weeks.
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
Markets around the world were higher for the week with nearly every market posting gains. International emerging markets lead the way with a very impressive +2.9% gain for the week and are now higher by +28.3% year-to-date. Contributing significantly to the emerging market gain was the biggest emerging market, China, posted a gain of +5.2%. Of the 10 largest emerging markets according to Blackrock, Russia is the only one in negative territory year-to-date.
As strong as international emerging market have been so far in 2017, it is only the 8th best start for these markets in 30 years. The accompanying graph shows the years with the best performance through August (blue bars), all of which were up +10% of more.
A strong start has historically been a good sign for performance for the remainder of the year with the full-year performance often ending much higher (green bars). There was only one year when performance was negative following such as strong year-to-date start, last year, when Emerging Markets were up +13.5% through August but then ended the year +10.5%. On average during these years with strong start, Emerging Markets went on to gain another 20% through the end of the year.
Source: S&P Compustat; 2017 “Thru August” is thru 8/25/2017 while all others are through month-end.
U.S. large stocks gained +0.8% for the week as volatility retreated after a spike higher during the prior couple weeks. Large U.S. stocks are now higher by +9.4% year-to-date and just -1.5% off the July all-time record highs. Small U.S. stocks staged a strong run this week gaining +1.5%. 2017 has, so far, turned into a disappointment for investors in small stocks as the year-to-date gain is also just +1.5%. International developed markets posted a +0.8% gain for the week with Germany’s market among the best performers up +1.5%.
Of the non-traditional investments, commodities are the only one moving lower for the week, down -0.7%, as the price of oil retreated. Real estate had one of its strongest performances of the year with a gain of +1.8% but still remains fractionally lower year-to-date. Gold inched higher by +0.4% and is up nearly double-digits for the year.
Bond prices posted gains of +0.2% for the week and are up just shy of 2% for the year. Indications from central bankers that the economy may continue to need some support helped prices.
Winners and Losers by Sector
J.M. Smuckers (SJM), the multi-billion-dollar food company, reported disappointing quarterly results with revenue down -4% and earnings dropping -23%. These are big drops for what tends to be a relatively stable business and industry. Negatively impacting results is a decline in sales of its Folgers Coffee although, as the accompanying graph shows, remains the market leader in ground coffee. The company believes it has the negative trend reversed but still had to lower full year earnings guidance due to the poor quarter. It’s stock fell -13.7% for the week and is lower by -17.9% for the year making it one of the poorer performing stocks in the market.
Source: Top 5 of Anything
Hormel Foods Corp (HRL), another multi-billion-dollar food company known for its Skippy and Spam brands among many others, also reported disappointing quarterly results. Revenue was down -4% and earnings declined -6%. The company said higher pork and beef costs are expected to put downward pressure on earnings throughout the remainder of the year. It’s stock fell -8.1% this week and is down -10% for the year.
Macy’s (M), one of many troubled retailers, saw its stock gain +8.3% for the week wiping away a small fraction of its year-to-date loss now standing at -41%. The company announced a restructuring including the hire of a former eBay executive to serve as the company’s president. Investors were clearly optimistic about the announcements but the longer term trends, as illustrated in the accompanying graph, will be a tough one to break.
Economic Indicator - Reported
The headline number for Durable Goods Orders was a decline for the month of July of -6.8%, worse than economists had predicted. The number was expected to be down due to the volatile transportation sector, including aircraft orders (aircraft orders were up 227% in June an down 82% in July), so it was of little surprise. On a much more positive note was the gain of +0.5% when excluding transportation, which was better than expected by 0.1%, helped by a resurgence in company’s making investments.
New home sales declined in July to an annualized rate of 571,000 but was offset by revisions to prior months of +33,000. Inventories increased by 4,000 in the month and is seen as a good sign given that inventories have been tight and likely constraining the market. Existing home sales also declined, down -1.3%, and were below economists’ predictions.
Economic Indicators – Upcoming
The August employment report will be the big economic news for the week. The consensus estimate among economists is that payrolls will increase by 180,000, down from a 209,000 gain in the prior month. The unemployment rate is expected to hold steady at 4.3%. This report tends to capture the attention of investors more so than any other because of impact it can have on the decisions made by central bankers about interest rates.
The second estimate for second quarter Gross Domestic Product (GDP) is expected to be revised higher to +2.8% from +2.6% for the first estimate. This is pushing ever so close to the 3% growth rate some optimist economists are hoping for.
Other reports will include the Housing Price Index, with a gain expected of +0.5% for the most recent month of June and a +5.8% year-over-year increase, and Consumer Confidence for August expected to remain near recent highs.