Week Ending 9/2/2017

Summary

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

Notable Market Headlines

In the shadow of North Korea threatening the world with continued missile launches as well as one of the costliest hurricanes to hit the United States, markets around the world rallied for a second week again with nearly every market posting gains. There are some questions about the economic impact Hurricane Harvey could have on the U.S. but, for the time being, the economy is on a strong footing with the first quarterly GDP read of +3.0% in years.

U.S. stocks lead the way higher with U.S. large stocks gaining +1.3% for the week while U.S. small stocks gained more than twice as much moving higher by +2.7%. Small stocks continue to lag behind large stocks by a wide margin year-to-date with large stocks now up double-digits and more than twice that of small stocks.

Although U.S. stocks did very well for the week, both the S&P 500 index and the Dow Jones Industrial index closed just shy of their all-time record high. The one major U.S. index to hit a new high was the NASDAQ Composite, up +2.8% for the week, as technology stocks performed well. The NASDAQ is among the best performing indexes in 2017 with a gain of +19.8%.

Source: www.yahoo.com/finance

International developed markets, including countries such as Japan being the largest component of this group followed by the United Kingdom, France, and Germany, gained +0.4% for the week as no particular market had a standout performance. International emerging markets were higher by +0.5% and remain the best performing markets year-to-date.

All of the less traditional asset classes also gained ground this week helping the performance of those investors with portfolios that are more broadly diversified. Gold was the biggest winner with a gain of +2.7% for the week. Gold is considered a safe haven for investors so it could be argued that its rally was the result of investors fearing the impact of North Korea. This just doesn’t hold true as investors did continue to buy stocks and the price of gold has been moving higher all year with a 2017 gain of +15.0%.

Commodities, driven by the higher prices of oil and gasoline due to Hurricane Harvey’s disruption in supply, gained +2.0% for the week. Real estate moved higher by +0.5% and is once again back into positive territory for the year.

Bond prices inched lower for the week, down -0.1%, resulting in slightly higher bond yields. The strong gross domestic product numbers give the Federal Reserve reason to continue raising interest rates but somewhat weak employment data and continued low inflation could make this difficult. All of this has a direct impact on the price of bonds as investors adjust bond prices based on expectations of future interest rates.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Health care stocks were the big winners this week with the entire sector posting a gain of +3.2% for the week. This is one of the best weekly gains for this sector in 2017.

Gilead Sciences Inc. (GILD), a $30+ billion in revenue biopharmaceutical company, announced an $11.9 billion acquisition of Kite Pharma, a 28% premium to the stock’s closing price. The announcement was extremely well received by investors with Gilead’s shares jumping +13.5% for the week. Gilead has been struggling with falling revenue and its stock price off its mid-2015 highs earlier this year by about -46%. This acquisition gives the company an entrée into the cell therapy markets and what investors expected to be strong ongoing growth.

Source: S&P Compustat

Several other biopharmaceutical stocks rallied during the week buoyed by the news of Gilead Sciences acquiring Kite. Incyte Corp (INCY), a company similar to Kite that was acquired by Gilead Sciences for a 28% premium, jumped +13.4% for the week. It has to be assumed that investors are hopeful an acquisition of Incyte is in the future. Its stock has now gained +37.7% year-to-date. A couple of the industry giants also posted impressive weekly gains, Biogen Inc. (BIIB) and Celgene Corp. (CELG), up +12.6% and 7.5% respectively.

Best Buy Co. (BBY), one of the nation’s leading technology retailers, saw its stock drop -11.9% for the week after reporting quarterly results. Both sales and earnings topped Wall Street estimates as did the revenue outlook for the current quarter but the CEO said that the big +5.4% increase in same-store sales was not a new normal. This clearly disappointed investors but the stock remains higher year-to-date by +27.7%.

Campbell Soup (CPB), the well-known food company, followed a negative trend established by some of its competitors the prior week. Its stock dropped -11.7% and is now lower by -24.9% year-to-date. This week’s decline was the result of disappointing quarterly results including an 11th straight drop in quarterly revenue.

Economic Indicator - Reported

The August U.S. employment report came in below the consensus estimate of 180,000 with just 156,000 new jobs created during the month. The unemployment rate ticked higher to 4.4%. On top of the August disappointment, July was revised lower by 20,000 jobs and June lower by 21,000. One big bright spot in the report was a surge in manufacturing adding 36,000 jobs. The challenge is that the multiple decade trend in manufacturing jobs has been negative so it is difficult to see this recent surge persisting for a meaningful period of time.

Second quarterly U.S. Gross Domestic Product (GDP) was revised higher to an annualized rate of +3.0%. As the accompanying graph illustrates, there has been a consistent increase in GDP year-over-year for the past 4 quarters. This second quarter number was above estimates of +2.8% helped by strong consumer spending and non-residential spending. The disappointment in the report was the continued low growth in prices, up just 1.0%. A strong economy and slow price growth creates a conundrum for the Federal Reserve when it comes interest rate policy.

Bureau of Economic Analysis: https://www.bea.gov/national/index.htm#gdp

Consumer Confidence remained strong in August with a reading of 122.9 which was well ahead of economists’ forecasts and continues to hover around multi-decade highs.

Economic Indicators – Upcoming

The coming week will be a relatively slow one for economic data. Factory Orders for July are expected to have fallen by -3.2%. Second quarter productivity is expected to have improved by +1.3% given the strong upward revision to second quarter GDP.

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