Week's Highlights: July 31 - August 4, 2017

Monday, August 7, 2017

Global equities edged higher overall last week amid continued US market strength and an impressive earnings season. The Dow Jones Industrials ended at another record high, its eighth in as many trading days and crossing 22,000 en route. A weakening US dollar and supportive economic data provided tailwinds. The S&P 500 and NASDAQ were less remarkable. Meanwhile, the euro rose to an 18-month high, a headwind for European multinationals but it supporting commodity prices. Accordingly, the STOXX Europe 600 index was down a little over 2% this week.

Volatility (the CBOE’s Volatility Index, the VIX) receded slightly, but didn’t quite make it back into the 9’s. The VIX closed at 10.0, down from the prior week’s 10.3.

Bond prices rose slightly last week, making their yields a bit lower. The 10-year US Treasury yield ended at 2.27%, off from the prior week’s 2.29%.

Oil prices turned south last week on increasing OPEC production and exports – then rallied back to a near breakeven week on Friday’s job numbers. Crude still ended July with a gain of 9% by Monday’s close of trading. That was its best month since April 2016. West Texas Intermediate (WTI) ended at $49.58 on Friday, slightly below the prior week’s $49.71. Brent global closed at $52.21, off from $52.50 the week before. The Baker Hughes rig count showed one less producing US rig, bringing the total to 765.



The Dow Jones Industrial Average reached a new milestone, breaking and closing above the 22,000 mark for the first time. Solid corporate earnings and a weakening dollar have provided a favorable backdrop for equities amid slow-but-steady economic growth and low inflation.

The market anxiously awaited July’s Employment Situation Report, aka the jobs report, on Friday morning. The labor markets remained tight in July. Our economy added 209,000 jobs, exceeding expectations for 181,000 and the six-month average of 180,000. Unemployment slipped to 4.3%, matching a recent 16-year low. However, despite solid job growth and low unemployment, wage growth remains cool. Average hourly earnings came in at a 0.3% monthly increase, keeping the annual growth rate steady at a 2.5%.

A key take away from the report is that it hit the sweet spot again. Strong job growth without equivalent wage growth keeps inflationary concerns at bay. The growth/inflation combination will likely keep the Fed from altering its currently expected monetary policy. The data should keep the Fed on course to a) begin shrinking its balance sheet in coming months and b) raise interest rates one more time in 2017. The fed funds futures market’s implied probability shifted its most likely next rate hike date to December. If you don’t spend time immersed in statistics textbooks, the “most likely” month is simply the first month going forward with an implied probability of over 50%. While December’s implied probability snuck in last week at 50.4%, January held that distinction a week earlier at 50.8%. Overall, the probability figures have stayed within +/- 2% over the last few weeks – giving you an idea of how fluid this is in investors’ minds.

Other economic data of interest included June’s:

Core PCE Price Index was +0.1%, right on expectations

Personal spending was +0.1%, again matching expectations

Personal income came in at 0.0%, a disappointment when judged against a forecasted +0.3%.

Earnings reports continued to support the markets. With results from ¾ of the S&P 500 companies in, Q2 earnings are up 10.1% (y-o-y). The increase significantly beats the 6.4% expected rise. It is expected they’ll reach an 11.8% increase by the time all Q2 results are reported. Revenues are expected to increase by 5% y-o-y.

The most asked question recently has been whether stocks are too high. Former Fed chair Alan Greenspan is more worried about bonds than stocks. He opined last week that we are experiencing a bubble, not in stock prices, but in bond prices. Real long-term interest rates are much too low and are therefore unsustainable, he said. Greenspan sees a return to 1970s'-style “stagflation,” or poor economic growth and rising inflation.

The Wall Street Journal reported that special counsel Robert Mueller ratcheted up the probe into Russia’s election interference, empaneling a grand jury in Washington, D.C. This indicates the probe is entering a new phase, suggesting it could prolong the whole thing. Shortly after the WSJ story, Sarah Huckabee Sanders said the White House had no knowledge of any such grand jury.

President Trump, seemingly fearing that his veto would be overridden by Congress, signed a sanctions bill that targets Russia’s energy and defense sectors. Though focus has been primarily on the Russian aspects, the bill also includes sanctions on North Korea and Iran. Trump’s objections to the bill stem from his belief that it encroaches on the executive branch’s authority to negotiate. Reacting to the bill, Russia’s Prime Minister Dmitry Medvedev declared that a full-fledged trade war has been declared against Russia. Russia also ejected 755 US diplomats and seized two diplomatic properties.

The Trump administration is considering taking trade action against China also. It is discussing launching a probe into Beijing’s insistence that foreign companies transfer technology to local Chinese subsidiaries and partners. The administration could launch a “Section 301” action, permitting the president to impose duties on products from countries using unfair trade practices. An announcement scheduled for Friday was canceled by the White House without explanation. Trump also linked trade with lack of progress on restricting North Korea's nuclear program, suggesting the potential for trade restrictions with China unless it takes action to restrain its neighbor.

The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
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