Second-Half of 2017 Starts with a Rally
Monday’s market close marked the end of the first seven months of the year, and it’s interesting to compare the results so far with what people expected at the start of the year.
At the start of the year, many investors and analysts were sold on the notion of the so-called “Trump Trade.” Deregulation and tax reform were expected to boost economic growth and corporate earnings.
That was positive for stocks, but new trade and immigration policies were expected to hurt global companies. So, domestic companies, especially smaller ones, were favored over large, global firms. Stocks of companies based outside of the U.S. fell out of favor.
The changes also were forecast to increase inflation and interest rates. Bonds were downgraded. The dollar was expected to rise in the next few years.
Those views were reflected in the markets after the Nov. 8 election and in the first few months of 2017. After it became clear that enacting Trump’s agenda would take time and wasn’t a sure thing, the markets began to reflect the current fundamentals more than the expectations of future policy changes.
Let’s take a look at how these trends were reflected in market prices for the month of July, and for the year through the end of July.
The stocks of large U.S. companies have done well. The Dow Jones Industrial Average is the leading U.S. index for the year, probably because it is composed primarily of the largest global companies. Boeing has led the way for the Dow, which was up 3.00% for July and 12.54% for 2017. The S&P 500 is a bit behind the Dow this year, being up only 2.30% for July and 11.79% for the year to date.
Smaller U.S. companies have lagged a lot in recent months. The Russell 2000 rose only 0.98% for July and was up 6.03% for 2017.
International stocks are back in favor after lagging following the election and are ahead of U.S. stocks. The All-Country World Index rose 3.24% in July and 15.19% so far in 2017. Emerging market equities are faring the best, delivering a 3.24% return for July and 25.39% for the year to date.
Fears of higher inflation and runaway growth subsided, and that has helped nominal bonds. Long-term treasuries rose 0.22% in July and are up 5.87% for 2017. Investment-grade bonds rose 1.12% in July and 5.44% for the year to date. Treasury Inflation-Protected Securities (TIPS) rose 0.60% in July and 1.41% for 2017. High-yield bonds were up 1.10% in July and 5.48% for the year to date.
One reason international stocks are doing well for U.S. investors is that the dollar has been hammered. It was down 2.61% for July and 8.81% for 2017 so far.
Commodities have been up and down. In the last month or so, demand and supply seem to be coming back into balance for many commodities. Energy-based commodities rose 3.08% for July but still are down 7.87% for the year to date. Broader-based commodities rose 1.34% in July and are down 5.12% for 2017. Gold was up 2.26% for July and 9.59% for the year to date.
The Data
This last week was the big one of the month for manufacturing data. The reports were generally positive, but the surveys and anecdotal reports still have optimism that isn’t reflected in the government data of actual activity.
The PMI Manufacturing Index increased to 53.3 from 52.0. Any number above 50 indicates growth. The 53.3 mark indicates moderate growth that is improving.
The ISM Manufacturing Index declined a bit to 56.3 from 57.8. However, that number was a little above expectations and still indicates strong growth. This index has been much stronger than its PMI counterpart.
The Dallas Fed Manufacturing Index reported that activity increased a bit in the last month. The index rose to 16.8 from 15.0, which was above expectations.
It was no surprise that the Chicago PMI Index took a steep fall to 58.9 from 65.7. Last month’s number was quite a surprise and unsustainable. The latest number still indicates very strong growth for the month.
The headline number for Factory Orders was strong with a 3.0% increase, but that’s misleading. There were a lot of aircraft orders bunched in the month. Exclude transportation, and orders declined 0.2%. That’s three consecutive months of declines or no change in orders from the previous month. The capital goods segment was unchanged, indicating businesses aren’t yet increasing their investments in plants and equipment.
The non-manufacturing sector continues to perk along. The PMI Services Index was 54.7, up from 53.0 last month and 54.2 in the mid-month flash update.
But the ISM Non-Manufacturing Index showed that growth in the service sector slowed a bit in July. The index registered 53.9, compared to 57.4 last month. That’s still a solid growth rate and the 91st consecutive month of growth for the index. The ISM Index has been well ahead of the PMI Index for months, so this month’s change puts them back in line with each other.
Existing home sales should increase in July and August, according to the Pending Home Sales Index. The index had a strong 1.5% increase after three months of declines. Pending home sales usually are reflected in existing home sales in a month or two, unless the sales fall through.
June appears to have been a lost month for households, according to the Personal Income and Outlays report. It found no increase in Personal Income after a 0.4% increase for May. Consumer Spending rose only 0.1%. The Fed’s favored inflation measure, the PCE Price Index, showed no increase and only a 0.1% rise in the core index (subtracting food and energy). The 12-month numbers for inflation still are well below the Fed’s target at 1.4% and 1.5%, respectively.
Consumer Sentiment, as measured by the University of Michigan, is losing the post-election bounce but still is at high levels. The final reading for July was 93.4, compared to 95.1 at the end of June. The burst in optimism early in the year didn’t boost consumer spending, so it’s likely this decline won’t lead to a reduction in spending.
Wage and salary increases remain moderate, as measured by the quarterly Employment Cost Index. The index, which includes both salaries and benefits, rose 0.5% for the second quarter compared to 0.8% for the first quarter. Over 12 months, employment costs increased 2.4%.
The preliminary data indicate Friday’s Employment Situation reports should be positive. The ADP Employment Report showed 178,000 new private sector jobs created during the month. Also, last month’s 158,000 total was revised higher to 191,000.
New unemployment claims declined 5,000, bringing the weekly number and four-week average very close to their historic lows.
The economy continued its steady-as-she-goes growth in the second quarter, according to the first estimate of second-quarter gross domestic product (GDP). Growth was much better than in the first quarter. There were no surprises in the report, largely because it’s a look back at the second quarter, for which we’ve already seen most of the data. However, the GDP report did show broad-based, moderate growth with low inflation. The trends should be sustainable.
The Markets
Some stock indexes reached record highs this week.
The S&P 500 rose 0.02% for the week ended with Wednesday’s close. The Dow Jones Industrial Average returned 1.42%. The Russell 2000, on the other hand, declined 2.02%. The All-Country World Index added 0.46%. Emerging market equities increased 0.76%.
Long-term treasuries rose 1.00%. Investment-grade bonds gained 0.26%. Treasury Inflation-Protected Securities (TIPS) returned 0.13%. High-yield bonds added 0.05%.
The dollar fell another 0.85%.
Energy-based commodities continued their rally with a 1.12% return. Broader-based commodities returned 0.34%. Gold gained 1.75%.
Bob’s News & Updates
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