The Second Quarter and First Half in Perspective

Most investors and media focus on U.S. stocks but that is not where the important action has been this year.

We wrapped up the second quarter of the year on June 30 and stocks did well across the board for the month, the second quarter and the first half of 2017. As seems to have happened every month so far this year, U.S. and international stocks switched relative performance from the previous month.

In June, U.S. stocks generally did better than international stocks. The international stocks, however, still are ahead for the second quarter and the first half.

The U.S. dollar and commodities are the more interesting stories. The dollar surged after the election last November. The consensus was that new policies would attract capital to the United States and boost the dollar.

That view quickly fell out of favor. The dollar has been falling against most currencies the better part of 2017. Against a basket of major currencies, the dollar lost 1.17% in June, 4.49% in the second quarter and 6.36% so far in 2017.

Commodities have been declining with the dollar. Energy, especially oil, is leading the way down. Energy-based commodities lost 1.83% in June, 5.75% in the second quarter and 10.63% for the first half of 2017. Broader based commodities declined 0.29%, 3.63% and 6.37% over the same periods.

Gold specifically had its ups and downs during the first half. It was down 1.89% in June and 0.25% for the second quarter. But it’s still up 7.08% for the first half of the year.

The move in the dollar is interesting, because a declining dollar usually is associated with rising inflation and declining stock prices. Inflation was rising in late 2016 and early 2017, but it slowed in recent months as the dollar declined. Likewise, stocks in the United States held up despite the falling dollar.

There’s also a paradox in commodity prices. Usually when the dollar is falling, commodity prices in dollars are rising. This year, however, commodity prices are declining with the dollar.

These are paradoxes worth watching, because markets are likely to return to normal relationships at some point.

To wrap up the performance as of the end of the quarter, the S&P 500 gained 0.61% for June, 3.06% for the second quarter and 9.28% for the first half of the year. The Dow Jones Industrial Average gained 1.73% for the month, 3.92% for the quarter and 9.26% for the half. The Russell 2000 surged 3.45% in June, but rose only 2.46% for the quarter and 5% for the year’s first six months.

The All-Country World Index climbed 0.46% for June. 4.43% for the second quarter and 11.57% for the first half. Emerging market equities rose 0.95% for the month, 6.11% for the quarter and 18.11% for the half.

In the bond markets, long-term treasuries gained 0.47% in June, 4.15% for the quarter and 5.63% for the first half. Investment-grade bonds rose 0.37%, 3% and 4.26% over the same periods. High-yield bonds inched up 0.08% in June, 2.07% for the quarter and 4.34% for the half.

The Data

Much of the economic data continue to show that the economy slowed somewhat in June but still was growing. We also continue to see the anecdotal and survey data registering more optimism and growth than the hard government economic data.

The PMI Manufacturing Index declined to 52.0 from 52.7 at the end of May. The mid-month flash was at 52.1.

The ISM Manufacturing Index, on the other hand, rose sharply to 57.8 from 54.9. This is the strongest reading since August 2014.

Factory Orders didn’t support that optimism. The headline number for orders was a 0.8% decline. Core capital goods rose a modest 0.2% and last month’s core capital goods orders number was revised higher to 0.3%. Those are modest growth numbers at best.

Consumer Sentiment, as measured by the University of Michigan, remains near the highs since the financial crisis, but it has been up and down recently. It was 97.1 at the end of May, fell to 94.5 for the mid-month flash and finished June up a little at 95.1.

Personal Income rose 0.4%, but that was mostly from interest, dividends and other non-wage sources of income. Wages and salaries rose only 0.1%. Consumer Spending also was weak, rising only 0.1%. The broad PCE Price Index fell 0.1%, while the core PCE Price Index, excluding food and energy, rose 0.1%. Both inflation measures are up 1.4% over 12 months.

The Chicago PMI was a notable exception in the data. It rose to 65.7 from 59.4. That’s its highest level since May 2014. This measure tracks both manufacturing and non-manufacturing activity in the Chicago area.

Next week, I’ll report on the widely watched employment data that will be released Thursday and Friday this week.

The Markets

The S&P 500 declined 0.30% for the week ended with Wednesday’s close. The Dow Jones Industrial Average was an outlier, rising 0.16%. The Russell 2000 dropped 0.27%. The All-Country World Index lost 0.53%. Emerging market equities fell 0.43%.

Long-term treasuries lost 1.36%. Investment-grade bonds dropped 0.44%. Treasury Inflation-Protected Securities (TIPS) declined 0.57%, while high-yield bonds fell 0.14%.

The dollar gained 0.32%.

Energy-based commodities actually rose again to gain 1.84%. Broader-based commodities returned 2.22% and gold lost 2.00%.

Bob’s News & Updates

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