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Week Ending 3/17/2017

Summary

  • Large U.S. stocks were fractionally lower while international market and other assets classes posted strong gains
  • The Federal Reserve raised interest rates as was widely expected
  • 10-year U.S. government bond yield hits 2-year high
  • Home flipping reaches 10-year high

Notable Market Headlines

We’ve had two back-to-back weeks that clearly demonstrate the benefits of diversification. A week ago it was U.S. large stocks that held up well while most other asset classes experienced meaningful declines. This was followed by the most recent week when U.S. large stocks declined fractionally, the S&P 500 was down -0.3%, while many other asset classes experienced meaningful gains.

International stocks posted big gains with stock in developed countries higher by +1.9% and emerging markets rallied a very impressive +3.9%. As the above graph shows, international emerging markets not only did very well this week but are among the leading performers year-to-date. The below graph shows the week’s and year-to-date performance for some of the key emerging markets.

Real estate and gold both recovered some of their recent losses and posted gains near 2% for the week. The price of oil stabilized, after falling in recent weeks, leaving commodities slightly higher for the week.

The Federal Reserve raised interest rates 0.25% to 1.0% as most on Wall Street were expecting. This follows their 0.25% rate hike just three months ago. The Fed further suggested two more rate hikes could occur yet this year as they remain confident in the strength of the U.S. economy.

Bonds surprised many investors by ending the week higher in spite of the Federal Reserve’s decision to raise interest rates which would be expected to put downward pressure on bond prices.

Economic Trivia Question

Home flipping, defined as a sale of a home twice in less than 12 months, reach a 10-year high in 2016. This was fueled by low inventories and, of course a common driver of such phenomena, a flood of money chasing deals. What was the average gross profit margin in 2016 when flipping a house (the % increase in the sale price versus the purchase price)?

Market Leaders

Wynn Resorts (WYNN) stock gained +10.7% for the week reaching a new 1-years high as investor outlook for the company improves. This casino company’s stock still trades at less than half its all-time high in early 20174.

Nvidia (NVDA) is a leading computer chip manufacturer including products for car manufacturer Tesla that are used in their driverless technology. Nvidia’s stock had been lower in prior weeks following an announced acquisition by Intel of one of its leading competitors. This week Nvidia’s stock gained +7%.

Market Laggards

Multiple airline stocks were among the biggest losers for the week. The declines were fueled by United Continental reporting February passenger traffic slightly below last year’s numbers. Here was the impact on some leading airline stocks:

  • United Continental (UAL): -7.6%
  • American Airlines (AAL): -5.0%
  • Southwest Airlines (LUV): -4.8%

Amgen (AMGN), the world’s largest biotechnology company, reported widely anticipated data on its new cholesterol-lowering drug showing positive results. Unfortunately, investors are concerned whether or not health insurers will pay for such high-priced drugs. Its stock fell -7.1%. Biogen (BIIB), another large biotech company, saw its stock fall -5.5%.

Economic Indicator - Reported

February Retail Sales grew by a less than expected +0.1%. This disappointment follows a January that was revised higher to a very impressive +0.6% resulting in a good overall start for the year. Negatively impacting retail sales is a slowdown in auto sales that account for about 20% of the total.

Inflation in the U.S. continues to inch higher. Retails inflation, measured by the Consumer Price Index, rose +0.1% for the month as expected and is higher by +2.7% during the past year. The surprise was a +0.3% jump in Produce Prices which could lead to more consumer inflation in later months.

Economic Indicators – Upcoming

A variety of housing related reports will be out this week including mortgage applications, the House Price Index, existing home sales, and new home sales. There is optimism that some of these numbers will bounce back from a disappointing January.

Durable Goods Orders are expected to be reported strong in February following the recent report of strong Industrial Production. Economists expect the indicator of manufacturing businesses to be higher by 1.5%.

Economic Trivia ANSWER

The average gross profit margin was 49.2% when flipping a house in 2016! This is according to a report by ATTOM Data Solutions and confirmed by other sources. The average house was purchased for $127,276 and sold in less than a year for $189,900 for a profit of $62,624 or 49.2%. This profit does NOT include the costs of remodeling as well as the transaction costs. This profit margin is the highest in history according to a separate report by RealtyTrac.

Source: Financial Advisor Magazine, “Home Flipping Hits 10-Year High”, March 13, 2017

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