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Week Ending 9/16/2017

Summary

  • U.S. stocks closed at record highs while international markets remain below 2007 levels
  • European Central Bank leaves interest rates unchanged but hint at future hikes
  • Apple unveils its newest iPhone

Source: S&P Compustat, www.yahoo.com/finance for Commodities

Notable Market Headlines

Investors clearly turned a blind eye to risk this week as the more traditional risky assets rallied the most and those considered to be safer havens lost value. U.S. stocks turned in a strong performance across the board and once again closed at all-time record highs. These record highs came in spite of the current menu of investor concerns including North Korea, extensive damage and economic disruption of two hurricanes, and general political turmoil. All of these concerns are valid but it’s important to point out that at nearly any time in history that stocks have hit new highs, there has been a menu of concerns. This is the classic example of the market “climbing the wall of worry.

The Dow Jones Industrials was the leading U.S. stock index with a gain of +2.2% or +470 points for the week to close at 22,268.34. This makes it one of the best weeks of the year for the Dow. The broader measure of U.S. large stocks, the S&P 500, gained +1.1% and is now higher by +11.5% year-to-date. Much more impressive though, and an example of investor flocking towards riskier investments this week, was the rally in small U.S. stocks jumping +2.3%. This big rally helped closed the gap between the performance of large and small stocks year-to-date but small stocks remain higher by only about half that of large stocks.

International stocks were strong as well with gains in nearly every country. International developed markets were higher by +0.8% while, in yet another example of investors’ interest in riskier assets, emerging markets jumped +1.6%. The gains in international markets in 2017 have been extremely impressive with emerging markets now higher by more than 30% for the year.

The closing prices of international markets certainly were new highs for 2017 and, for that matter, represent multi-year highs but NOT all-time highs such as we are experiencing in U.S. markets. Markets around the world all generally hit highs in or around October 2007 prior to the financial crisis. U.S. large stocks are now +58% above their October 2007 highs while U.S. small stocks are +64% higher. On the contrary, the vast majority of international markets have NOT reached the highs set a decade ago and many are nowhere close.

The accompanying graph shows select representative developed markets countries and where their markets are today as compared to the highs a decade ago. Overall, developed markets remain -23% below the decade ago highs with various individual countries better or worse than the average of course. The worst in this group is Italy with its stock market still -58% below its 2007 highs.

Source: S&P Compustat with markets represented by applicable ETF

International emerging markets are slightly better overall now only -18% below the 2007 highs. The difference by individual country various greatly again with Brazil and Russia among the worst performers while India’s market is one of the very few that has finally reached all-time new highs.

Source: S&P Compustat with markets represented by applicable ETF

This is all a great reminder that the very strong bull market of the past 8+ years has been very much led by U.S. markets. This tends to be good for U.S. investors as they tend to have a majority of their portfolio invested in U.S. stocks. That said, it is important to remember that it is not always the case that U.S. stocks lead the rally and investors should be well-diversified among all of the worlds’ stock markets.

Losing its luster this week was gold with a decline of -1.9%. Gold is often considered a safe haven by investors and, as discussed in last week’s market commentary, often does NOT move in the same direction as stocks. In spite of the decline, gold does remain higher for the year by +14.5%.

Commodities rallied with the price of oil gaining ground. For the week commodities were higher by +2.0% but are still lower by -5.7% year-to-date. Real estate, another non-traditional investment, slipped -0.2% for the week after posting a strong gain the prior week.

Bonds, after one of their strongest gains of the year in the prior week, fell this week by -0.5%, an amount equal to the prior week’s gain. Again, as investors seek out riskier investments, bonds, considered a safer investment, faced significantly selling pressure. This decline was also fueled by the heightened expectation for higher interest rates in the future and the rate of inflation finally ticking slightly higher.

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Given the strength of stocks and the record highs set by the market averages, the majority of individual stocks were higher this week. Leading the week’s rally were many stocks that have been losers year-to-date including many energy stocks with the sector gaining a big +3.8%. Below are some of the energy stocks posting strong gains this week:

Source: S&P Compustat

Apple Inc. (AAPL) revealed its latest version of the iPhone as was widely anticipated. None of the news came as much surprise to investors with its stock price gaining +0.8% for the week or just less than the overall market. Clearly investors’ expectations are high for Apple to continue delivering sales and earnings growth as the stock has gained +38.0% year-to-date representing an increase of +$227.6 billion in market value.

Nvidia Corp (NVDA), a $108 billion market cap technology company focused on computer graphics, artificial intelligence, and more, received some very positive comments from a Wall Street analyst that investors paid attention to. The analyst, C.J. Muse at Evercore, raised his price target for the stock to $250 saying that the company has a leading position in the development and implementation of artificial intelligence. The stock gained +10.0% for the week to close at $180.11. Normally such analyst comments do not have this impact. It is unusual for analyst comments to have such an impact.

Equifax Inc. (EFX), one of the biggest losers a week earlier, repeats again this week as a big loser. The stock was down another -24.6% for the week after losing -13.0% the week before. This information and consumer credit agency experienced one of the biggest data breaches on record and is continuing to feel the fallout. One look at the company’s stock price this year can give investors an idea of the impact of a cyberattack on any business.

Source:www.yahoo.com/finance

Economic Indicator - Reported

Inflation generally ticked higher in the most recent reports but remains below the Federal Reserve’s desired level. The Consumer Price Index (CPI) for August increased by +0.4% primarily due to an increase in energy prices. When excluding food and energy, it was higher by just +0.2% as economists had expected. The year-over-year number, excluding food and energy, was higher by +1.7%. This report was well received by investors and is believed to give the Federal Reserve support for its unwinding of its balance sheet.

Another read on inflation, the Producer Price Index (PPI), came in at +0.2% for the month and +0.1% when excluding food and energy. The headline gain of +0.2% was below economists’ expectations for the third consecutive month and suggests a lack of pricing pressure at the base of the economy.

Retails sales disappointed in August with a decline of -0.2% as compared to an estimate of a gain of +0.1%. Not only did the August report come in below expectations but there were also meaningful revisions lower to prior months’ reports. It is unclear at this point how much impact there may have been to this report from Hurricane Harvey but weaker auto sales is one number believed to have been impacted.

Economic Indicators – Upcoming

There are no major economic reports expected in the coming week. We’ll get two reports on housing including Housing starts and separately Existing Home Sales. Housing starts are expected to have increased in August and the same for existing home sales.

The Leading Indicators report, a composite of 10 forward-looking indicators, is expected to have rose by +0.2% in August as compared to a gain of +0.3% in July. Low interest rates and consumer optimism is expected to help this report.

Contact Mark A. Patton :