Bob’s Journal for 6/27

It is a good idea for investors to keep an eye on the market performance of semiconductor companies.

I don’t recommend using only one indicator to assess where the market is likely to head, but the semiconductors have a good history of tipping us off to market and economic downturns. This makes a lot of sense, since the economy uses a lot of technology, and semiconductors are the foundation of most technology products.

A slowdown in semiconductor sales usually means that overall economic activity is weakening. A look at the charts also reveals that semiconductor stocks have peaked many times before the broader market indexes have. Likewise, semiconductors have been able to recover from their lows before the broader indexes.

While the semiconductors were issuing some warnings recently, they might have turned the corner in the last week. You can follow the semiconductor stocks through the Philadelphia Exchange Semiconductor Index. It also is known as the SOX and uses the ticker SOX. You also can follow the exchange-traded fund (ETF), the iShares PHLX Semiconductor ETF (SOXX), that tries to mimic the SOX.

The SOX began to tumble in early May, a few weeks before the S&P 500, and reached a bottom in early June. It barely bounced off its recent lows when the recovery stalled. The fundamentals from the semiconductor companies also weren’t positive.

A couple of weeks ago, Broadcom (AVGO) lowered its earnings and revenue guidance for the second half of 2019. It said the U.S. sanctions against China’s Huawei were causing problems for AVGO. But Broadcom also announced that there was a broad-based global slowdown in the purchase of semiconductors. Last quarter, the company stated that it expected meaningful growth to resume soon.

But the SOX increased about 3% yesterday, and all 30 stocks in the SOX index closed at higher prices than they did on the day before. The surge was lead by a 13% increase in Micron (MU). The company’s CEO said it was able to resume some shipments to Huawei and had mitigated 90% of the impact of the tariffs.

As I said, don’t manage your portfolio based on one indicator. But keep SOX among the indicators you follow. It is likely to give an early clue as to the next moves of the market indexes.

The Data

The economy slowed a little more in the first half of June, according to the PMI Composite Flash Index. The manufacturing index declined to 50.1 from 50.6, indicating that sector is barely expanding. The services index declined to 50.7 from 50.9. The combined composite declined to 50.6 from 50.9. A reading above 50 indicates an expansion, while a reading below 50 indicates the economy is contracting.

The Leading Economic Indicators Index was unchanged in May, following a 0.2% increase in April. The index has been moving steadily down for months and indicates that economic growth should be lower in the second half of 2019.

There was a lot of housing data in the last week. Existing home sales increased by 2.5% in May, but they’re still down 1.1% over 12 months. The three-month average of existing home sales is a negative 0.9%. The higher May sales occurred despite a 4.0% increase in the median purchase price.

Pending home sales, which will appear as existing home sales in a month or two, increased 1.1% in May, according to the National Association of Realtors (NAR). The NAR’s Pending Home Sales Index increased to 105.4 from 104.3.

New home sales, which had been doing better than existing home sales, declined 7.8% in May and are down 3.7% over 12 months. The three-month average of new home sales is close to unchanged. The median price is down 8.1% for May and 2.7% over 12 months. It is worth noting that new home builders have focused on higher-priced homes in recent years. That’s restrained the number of sales.

The prices of homes also have stalled, according to the S&P Corelogic Case-Shiller House Price Index. The index said that prices were unchanged in April. For the past 12 months, prices increased 2.5%, which is the lowest level in seven years.

Yet, the FHFA House Price Index found that prices increased 0.4% in April and 5.2% over 12 months. Those numbers are improvements over the 0.1% and 5.0%, respectively, that were reported for March.

Reports from the manufacturing sector continue to be mixed. This week, the Dallas Fed Manufacturing Survey delivered mixed news. The Production Index increased to 8.3 from 6.3. However, the General Activity Index fell to negative 12.1 from negative 5.3. The components of the survey were mixed, but the most concerning component was capital expenditures that declined to a two-year low.

The Richmond Fed Manufacturing Index had somewhat better news. It declined to three from five, still indicating growth in that sector in that region. Again, components of the survey were mixed. The most worrying component was employment, which reached a two-year low.

Durable Goods Orders were not as pessimistic. The headline number was a sharp negative. New orders were down 1.3% in May, following a revised 2.8% decline in April. But after excluding the volatile transportation sector, orders increased 0.3%. The important core capital goods component, which closely tracks business investment, increased 0.4% following a 1.0% decline in April.

Consumer Confidence, as measured by the Conference Board, tumbled to 121.5 from 134.1. The respondents to the survey cited tariff and trade conflicts as the reason for their decline in confidence. In addition, the employment components of the survey were not as strong as they had been in recent months, indicating that there might be some weakness developing in the job market.

New unemployment claims increased 10,000 to 227,000. The four-month average increased to 221,250 from 219,000. The new claims are higher than the historic lows of March and April, but they are in the same range they’ve been in since February 2018.

The third estimate of first quarter gross domestic product (GDP) was unchanged and still recorded a 3.1% annualized growth in the economy. Consumer spending was revised down to a 0.9% increase from a 1.3% estimate. Nonresidential fixed investment was revised higher to a 4.4% increase from a 2.3% rise.

The Markets

The S&P 500 fell 0.40% for the week that ended with Wednesday’s close. The Dow Jones Industrial Average rose 0.11%. The Russell 2000 dropped 2.43%. The All-Country World Index (excluding U.S. stocks) increased 0.37%, while emerging market equities added 0.90%.

Long-term treasuries fell 0.43% for the week. Investment-grade bonds declined 0.07%. Treasury Inflation-Protected Securities (TIPS) added 0.03%. High-yield bonds lost 0.30%.

As for notable currency moves, the U.S. dollar fell 0.95%.

Energy-based commodities rose 4.54%. Broader-based commodities added 2.99%, while gold jumped 3.93%.

Bob’s News & Updates

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