Monthly Economic Update August 2016

Monthly Economic Update August 2016

THE MONTH IN BRIEF
The post-Brexit bounce turned into a sustained rally across July. Second-quarter earnings were not as gloomy as anticipated, and core economic indicators often matched or surpassed expectations. Housing news was generally good, and the latest jobs report showed employers hiring in spectacular fashion. Panic did not spread through European markets; in fact, July was a great month for European (and global) equities. Precious metals shone brightly, but energy futures fell hard. July did end with a troubling initial estimate of Q2 GDP that seemed to suggest the U.S. economy would stall without its current, strong level of consumer spending (and, by extension, consumer confidence).1

DOMESTIC ECONOMIC HEALTH
All in all, the major economic reports from June and July were pretty positive – none more so than the June employment report from the Department of Labor. There were 287,000 net new hires in the sixth month of 2016, the most in eight months. (Compare that to the consensus projection of 180,000 from Bloomberg.) As more people were seeking work in June, the jobless rate inched up to 4.9% (the U-6 rate, including the underemployed, inched down to 9.6%).2

Weeks after the Brexit decision in Europe, U.S. consumers seemed little rattled. The Conference Board’s July consumer confidence index barely budged from its (revised) June level – only down a tenth of a point to 97.3. At the University of Michigan, survey results took the nation’s other major consumer sentiment survey down just 3.5 points from its final June reading to 90.0.3

July ended with investors and economists still awaiting personal spending numbers for June; the Department of Commerce had announced a 0.4% gain for consumer spending in May. In its first estimate of Q2 GDP, the Bureau of Economic Analysis calculated a robust 4.2% consumer spending advance for the April-June period. Retail sales numbers for June showed households spending 0.6% more on goods and services, with the core retail sales gain at 0.7%.3,4,5

Core consumer prices had risen 0.2% in June, leaving them up 2.3% in 12 months. The headline Consumer Price Index was up 0.2% in June as well. Producer prices rose 0.5% for June; core prices, 0.4%.3

Now to the Institute for Supply Management’s monthly purchasing manager indices. The June readings were 56.5 for the services PMI and 53.2 for the manufacturing PMI – both representing major increases. In May, the services PMI had been at 52.9; the manufacturing PMI, at 51.3. Another nice bit of manufacturing news: federal government data showed industrial production up 0.6% in June.3,6

On June 29, the Bureau of Economic Analysis issued its first estimate of second quarter growth. Economists, polled by Bloomberg, expected 2.5% expansion. Instead, growth was measured at 1.2%. A 4.2% jump in personal spending and 6.8% improvement in outlays on goods were offset by a 2.2% dip in non-residential fixed investment and a 1.2% reduction in inventories. The BEA also trimmed the Q1 advance of the economy back to just 0.8%.5

The Federal Reserve made no move with interest rates in July, but its latest policy statement sounded a gently hawkish note, mentioning that “near-term risks to the economic outlook have diminished.”7

GLOBAL ECONOMIC HEALTH
Eurozone economic growth was halved to 0.3% in the second quarter, Eurostat reported in late July. Projected annualized growth fell from 2.2% in Q1 to 1.2% in Q2. These numbers seem to point out that the eurozone economy was shaky even before the recent terror attacks and the Brexit vote. (That shakiness might even factor into our own 4.0% June, drop in durable goods orders.) France saw no growth at all in Q2. Eurozone joblessness remained at 10.1% in June while yearly inflation was just 0.2%, a long way from the European Central Bank’s target inflation rate of 2.0%.3,8

Late July also brought second-quarter economic news from China, and those numbers were comparatively encouraging. Its government estimated annualized GDP running at 6.7% in Q2, above official projections. More importantly, Q2 marked the first time in a year that this number had improved. Industrial output was at an annual growth pace of 6.2% in the quarter, surprising to the upside. Slightly further east, the Bank of Japan disappointed investors with its July stimulus.9,10

WORLD MARKETS
European benchmarks followed up a largely desultory June with an impressive July. Eyeing the one-month gains at the close on July 29: the DAX advanced 5.74%; the CAC 40, 3.88%; the IBEX 35, 3.85%; the Euro Stoxx 50, 3.55%; the FTSE MIB, 3.38%; and the FTSE 100, 2.23%. A notable exception was the RTS – Russia’s stock benchmark lost 0.62% on the month.11

Away from Europe, the gains were major as well. The MSCI World index added on 4.15%, and the MSCI Emerging Markets Index improved 4.72%. India’s Nifty 50 and Sensex, respectively, advanced 3.72% and 3.34%. The Hang Seng rose 5.28%; the Nikkei 225, 5.65%; and the S&P/ASX 200, 6.02%. Brazil’s Bovespa topped them all with a 9.72% July ascent. To our north, Canada’s S&P/TSX Composite rose 3.68%. To our south, Mexico’s IPC All-Share gained 0.97%.11,12

COMMODITIES MARKETS

July was a great month for silver. It rose 8.10%, settling at $20.38 on July 29. Platinum futures did even better – they advanced 11.39% in July. Copper and gold witnessed more modest gains, respectively rising 1.27% and 1.98%. Gold ended July at $1,357.90 an ounce on the COMEX. The U.S. Dollar Index retreated 0.46% for the month.13,14

Three marquee energy futures fell more than 10% on the NYMEX in July. Oil closed at $41.38 a barrel on July 29, down 14.50% for the month. Unleaded gasoline futures dropped 11.57%, while heating oil futures gave back 11.19%. Natural gas lost 2.69% in July.  Among the major crops, cotton had the best month, up 14.76%. Soybeans had the worst month, down 12.26%. In between those contrasts, coffee rose 1.36%, while wheat slipped 5.16%; sugar, 5.46%; and corn, 7.88%.13

REAL ESTATE
After descending in mid-July, home loan rates finished the month almost precisely where they had been at the end of June. Freddie Mac’s July 28 Primary Mortgage Market Survey showed an average interest rate of just 3.48% on a 30-year fixed-rate mortgage (and that had actually dipped to 3.41% in the July 7 survey). Interest on both 15-year FRMs and 5/1-year ARMs averaged 2.78%. Looking back to the June 30 PMMS, the numbers are exactly the same except for a 2.70% average interest rate for the 5/1-year ARM.15

As for home sales, the latest data was largely positive. The National Association of Realtors announced a 1.1% gain in home buying in June (after a revised 1.5% decline for May). NAR did note a 0.2% reduction in pending home sales in the year’s sixth month. New home buying rose 3.5% for June, partly offsetting the 6.0% slip recorded by the Census Bureau a month earlier.3

Turning to home values, news came that the S&P/Case-Shiller home price index (20-city composite version) was up 5.2% year-over-year in May, down from 5.4% in April. Building permits and housing starts picked up in June; the Census Bureau announced a 1.5% gain for the former and a 4.8% gain for the latter.3

LOOKING BACK…LOOKING FORWARD
Wall Street’s leading tech and small-cap benchmarks had a terrific July. Last month, the Nasdaq Composite rose 6.60% to 5,162.13, while the Russell 2000 gained 5.90% to 1,219.94. That took their respective 3-month gains to 8.10% and 7.88%.11,16,17

Where did the Dow and S&P 500 finish at the end of July? The Dow closed the month at 18,432.24; the S&P, at 2,173.60.11

The Dow couldn’t quite match the S&P’s 3.60% July gain, but it was still up 2.80% for the month. At the close on July 29, its year-over-year gain had improved to 3.87%. The S&P wasn’t the only index scaling new peaks in July: the blue chips reached an all-time high of 18,595.03 last month.18

% CHANGE Y-T-D 1-YR CHG 5-YR AVG 10-YR AVG
DJIA +5.78 +3.84 +10.36 +6.43
NASDAQ +3.09 +0.99 +17.46 +14.65
S&P 500 +6.34 +3.08 +13.64 +7.00
REAL YIELD 7/29 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS -0.03% 0.52% 0.38% 2.41%

Sources: investing.com, bigcharts.com, treasury.gov – 7/29/1611,19,20,21

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

The July rally finally seemed to lose steam at the end of the month. The market had to cool off at some point. Are we now at that point? Admittedly, August tends to be a poor month for Wall Street. In fact, major selloffs have occurred in four of the past six Augusts, and the average August performance of the S&P 500 was -0.65% during 2006-15. Going into the eighth month of the year, stocks were already treading water: across the last 11 market days of July, the S&P traded within a range of just 0.92%, something that hasn’t happened over the past 45 years. It may be that the bulls just need a pause. Alternately, perhaps the balance of earnings season and some nice hiring and manufacturing surprises can send stocks yet higher this month, even if the gains are tempered by bulls reining in their enthusiasm.22

UPCOMING ECONOMIC RELEASES: Here we have the slate of major stateside economic news across August: ADP’s July employment change report plus the July ISM services PMI (8/3), the July Challenger job-cut report (8/4), the Department of Labor’s July jobs report (8/5), July’s PPI, July retail sales, and the preliminary August University of Michigan consumer sentiment index (8/12), July industrial production, groundbreaking and building permits, and the July CPI (8/16), the minutes from the Federal Reserve’s July policy meeting (8/17), the July leading indicator index from the Conference Board (8/18), July new home sales (8/23), July existing home sales (8/24), July capital goods orders (8/25), the second estimate of Q2 GDP and the final August consumer sentiment index from the University of Michigan (8/26), the July PCE inflation gauge and July personal spending (8/29), June’s S&P/Case-Shiller home price index and the August Conference Board consumer confidence index (8/30), and, lastly, July pending home sales and the ADP employment change report for August (8/31).

MONTHLY QUOTE

“Dreams come true. Without that possibility, nature would not incite us to have them.”

– John Updike 

MONTHLY TIP

As you save for retirement, one strategy to try and offset the effect of inflation is to raise your retirement plan contributions. Keep in mind that even a 1% boost in the annual contributions to a tax-deferred retirement account could help you enlarge your savings and lower your income tax.  

MONTHLY RIDDLE

It disappears when you are awake. It disturbs you when you are asleep. What is it?

Last month’s riddle:
I weigh nothing, but you can see me. Put me in a bowl, and I’ll make it lighter. What am I?

Last month’s answer:

A hole.

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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. MarketingPro, Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The EURO STOXX 50 Index, a leading blue-chip index for the Eurozone, provides a blue-chip representation of its supersector leaders. The FTSE MIB (Milano Italia Borsa) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The RTS Index (abbreviated: RTSI, Russian: Индекс РТС) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The Nifty 50 is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange from Standard & Poor’s. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Mexican IPC index (Indice de Precios y Cotizaciones) is a major stock market index which tracks the performance of leading companies listed on the Mexican Stock Exchange. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

Citations.

1 – us.spindices.com/indices/equity/sp-500 [7/29/16]

2 – csmonitor.com/Business/new-economy/2016/0708/Jobs-report-A-relief-after-disappointing-May-politically-turbulent-June/ [7/8/16]

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4 – marketwatch.com/economy-politics/calendars/economic [6/29/16]

5 – forbes.com/sites/timworstall/2016/07/29/us-gdp-growth-slow-at-1-2-consumer-spending-is-obviously-not-the-only-thing-driving-growth/ [7/29/16]

6 – instituteforsupplymanagement.org/ismreport/nonmfgrob.cfm [7/6/16]

7 ­- marketwatch.com/story/fed-appears-more-open-to-september-rate-hike-2016-07-27 [7/27/16]

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18 – tradingeconomics.com/united-states/stock-market [7/30/16]

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19 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F29%2F15&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F29%2F15&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F29%2F11&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F29%2F11&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F29%2F11&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F28%2F06&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F28%2F06&x=0&y=0 [7/29/16]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F28%2F06&x=0&y=0 [7/29/16]

20 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [7/29/16]

21 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [7/29/16]

22 – marketwatch.com/story/heres-how-aging-bull-market-can-grind-out-more-all-time-highs-2016-07-30/ [7/30/16]

 

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