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Week Ending 7/15/2017

Summary

  • U.S. stocks closed at record highs
  • Earnings season kicked off with some positive reports from large banks
  • Inflation and retail sales remain weak

Notable Market Headlines

Everything moved higher for the week with international markets leading the way and U.S. markets closely following. Large U.S. stocks gained +1.4% to close at record highs as the breadth of the market was strong with 74% of stocks higher and only 26% lower. Although the S&P 500 and the Dow Jones Industrials reached record levels, the NASDAQ Composite, consisting of many technology stocks, did close shy of its record suggesting other sectors, such as industrial and health care stocks, pushed higher. Small U.S. stocks gained for the week, up +0.9%, but did lag behind. They remain behind year-to-date with a gain of +5.1% while large U.S. stocks are higher by nearly double that at +9.9%.

International stocks did lead the rally with international developed country stocks up +2.3% and emerging market stocks surging +5.6%. The surge in emerging markets was fueled by the largest emerging market, China, gaining +6.1%, and Latin America’s biggest market, Brazil, gaining +8.1%. Emerging market stocks are now higher by +24.0% year-to-date, a powerful rally. In spite of this rally, as the accompanying graph illustrates, emerging market stocks have been a disappointment for investors since the 2007 highs with emerging markets still down -22% from the highs a decade ago while large U.S. stocks are higher by +59% during the same time.

Commodity prices gained as the price of oil continued a rebound from earlier selling up +2.6%. A closely watched report from the International Energy Agency indicated they expect the demand for oil to grow worldwide into 2018 in spite of more widespread use of alternative energy sources.

Gold prices climbed 1.3% and real estate gained +1.0%. Both of these are considered to be especially good investments during periods of rising inflation. The reports this week that inflation in the U.S., both at the consumer and producer level, remains low will likely keep some downward pressure on both gold and real estate.

Bond prices inched higher by +0.4% for the week. Congressional testimony by Fed Chairman Janet Yellen indicated the Fed may raise interest rates more slowly this year depending on economic data. Certainly the inflation reports this week would be data points supporting a slowdown in hikes.

Investor Trivia Question

Morningstar, an industry-leading investment research firm, awarded its mutual fund manager of the year award for 2016 on January 25 of this year. The winner was David Wallack of the T. Rowe Price Mid-Cap Value Fund (TRMCX). How well do you think this fund has done in 2017?
See below for answer.

Winners and Losers by Sector

Stock Highlights

NRG Energy (NRG) stock surged +43.1% for the week and is higher by +89.6% year-to-date. This power company announced an ambitions transformation plan with the goal to strengthen its balance sheet. The plan calls for more than $1 billion in annual cost reductions and divestment of assets to reduce its debt. The power industry has been gaining attention recently with high-profile investors such as Warren Buffet looking to enter the space.

Some of the country’s largest banks kicked off second quarter earnings season on a positive note including the following:

As the accompanying table illustrates, the positive earnings announcements did NOT translate into stock price gains for these banks this week. Furthermore, year-to-date performance has been below the market average for both J.P. Morgan and Wells Fargo in spite of what is seen as a positive political environment for this industry.

In spite of the overall market averages at or very near market highs, as is always the case, not all stocks are participating in the rally. Many of those lagging behind are in the retail and energy sectors. Here are some highlights:

  • Under Armour Inc. (UAA): -53% off 1-year high. Issue: struggling with earnings growth in the challenging retail environment.
  • Macy’s (M): -50% off 1-year high. Issue: facing continued declines in sales and earnings.
  • Range Resource (RRC): -48% off 1-year high. Issue: decline in energy prices.
  • TripAdvisor (TRIP): --46% of 1-year high. Issue: declining earnings.

Economic Indicator - Reported

We received to economic reports showing inflation continuing to trend below the Federal Reserve’s target rate making it somewhat more difficult for the Fed to continue raising interest rates. Consumer inflation, the CPI, was reported flat in June as compared to an estimate of +0.1%. The core rate, excluding volatile food and energy, gained +0.1% for the third consecutive month.

The Produce Price Index (PPI) inched higher by +0.1% in June but again slightly below expectations of a +0.2% gain. The year-over-year change is +2.0% at the end of June which is down from +2.4% a month earlier. This downward trend in inflation is arguably a reflection on weakening demand.

June Retail Sales disappointed with a decline of -0.2% for the month as compared to an estimate for a gain of +0.1%. There is weakness in a variety of areas including department stores, restaurants, and gasoline. This report does not bode well for GDP in the second quarter.

The report on Industrial Production was a bright spot for the economy showing a gain of +0.4%, slightly higher than economists had forecast. Manufacturing makes up the bulk of this report and was higher by +0.2% with other sectors such as mining, vehicles, and hi-tech topping the average.

Economic Indicators – Upcoming

It will be a relatively slow week for economic reports with highlights including Housing Starts for June expected at 1.17 million and, unrelated, the Leading Economic Indicators estimated higher by +0.4% following two months of somewhat weakness.

Investor Trivia ANSWER

The T. Rowe Price Mid-Cap Value Fund (TRMCX), managed by Morningstar’s mutual fund manager of the year, has gained +3.1% year-to-date through June 30th while an appropriate benchmark is up +5.2%. This short-term disappointing performance is a reminder that actively managed funds, such as this fund, can have both periods of strength and weakness but, on average, lag behind their benchmarks over a longer periods of time.

I was also able to find information on the winners for 2015 as well. The domestic stock fund winner underperformed in 2016 and has outperformed in 2017. The same is true for the 2015 international stock fund manager of the year. Again, this simply illustrates the inconsistency in performance for active managers and the risk that longer term returns will lag behind index funds in the same category.

Source: www.morningstar.com/advisor/t/118217845/announcing-morningstar-s-2016-fund-managers-of-the-year.htm, beta.morningstar.com/articles/737661/announcing-morningstars-2015-fund-managers-of-the-year.html

Contact Mark A. Patton :