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Week Ending 10/7/2017

Summary

  • U.S. stocks quietly proceeded higher and closed a fraction of a percent off Thursday’s record highs
  • The U.S. employment report showed the first jobs loss since 2010 impacted by hurricanes
  • U.S. government bond prices decline for 4th consecutive week on expectations of higher rates

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

Notable Market Headlines

U.S. stocks continued reaching all-time highs this week with both U.S. large stocks and U.S. small stocks gaining +1.3%. The major market indexes were higher 4 of the 5 days with the one exception being the tech-heavy NASDAQ gaining 5 of 5 days. This week’s gains leave U.S. large stocks higher by +13.8% year-to-date while small stocks are higher by +11.3%.

International stocks were mixed with developed country stocks down fractionally. One country holding back the group was Spain with its markets losing -2.6% as it battles political turmoil and the desires of some in Spain to secede from the country. In spite of this decline in Spain’s market this week, it remains one of the best performing developed country markets year-to-date higher by +24.0% compared to the average developed country with gains of +18.5%.

International emerging market had lost some momentum the past couple of weeks but picked it back up this week with a gain of +1.8%. The markets in China, the biggest emerging market, surged +4.0%. China’s market hit a recent high in 2015 that was followed by a rapid 40% decline that it has yet to recover entirely from in spite of this year’s +32% rally.

Gold declined once again this week losing -0.4%. It is now -5.5% below its 2017 high set one month ago but remains higher year-to-date by +10.5%. Gold tends to be considered a safe-haven for investors but safety is not what seems to be in vague at the moment. Commodity prices also declined this week, off -1.8%. Real estate stocks inched higher by +0.5%. Commodities and real estate are both negative year-to-date.

Bond prices declined by -0.4% this week resulting in higher yields. The strong economic reports this week further build the Federal Reserve’s case for higher interest rates which are expected as soon as December. U.S. government bonds, which make up about 38% of the overall bond index we follow, have been falling in prices for the past month losing more than 2% in value which is a significant move for these bonds.

Source: www.yahoo.com/finance

Winners and Losers by Sector

Source: S&P Compustat

Stock Highlights

Netflix (NFLX), the wildly popular internet television network, announced it is raising prices for its most popular U.S. video streaming plan by 10%. The stock jumped this week on the news by +9.2% to a new all-time record high. Furthermore, some analysts believe the company may have exceeded subscriber growth estimates in the most recent quarter. The stock is flying high with a gain of +60% year-to-date.

General Motors (GM) stock has been on a rapid climb higher since the hurricanes have struck the U.S. This stock gained +11.3% this week and is now at just shy of $45. Since Hurricane Harvey struck in late August the stock ishigher by nearly 30%. Auto sales had been sluggish in 2017 but picked up sharply in September with it estimated that as many as 700,000 cars were damaged or destroyed by the two hurricanes. Analysts expected the hurricane impact to last through November.

Source:https://www.reuters.com/article/us-usa-autos-sales/hurricane-recovery-helps-boost-u-s-september-new-auto-sales-idUSKCN1C81R3

Source: www.yahoo.com/finance

Several airline stocks popped higher this week following some positive comments from at least one Wall Street analyst as well as optimism by the CEO of American Airlines. Further helping these stocks was a decline in the price of oil. Following are some of week’s winners:

  • American Airlines (AAL): +8.0%
  • Delta Air Lines (DAL): +7.9%
  • United Continental (UAL): +7.2%
  • Alaska Air Group (ALK): +5.6%
  • Southwest Airlines (LUV): +4.4%

MGM Resorts International (MGM), the owner of the Mandalay Bay Resorts where last week’s horrific shooting took place, saw its stock drop -5.5% this week representing a loss of market value in excess of $1 billion. Analysts expect travel bookings to be down.

Economic Indicator - Reported

Economists had widely expected the September employment report to be meaningfully impacted by the two major hurricanes. The consensus forecast was for 95,000 new jobs with a very wide range of 0 to 140,000. It was reported instead that the economy shed -33,000 jobs during the month making it the first negative month in 7 years. Restaurants, the biggest jobs losing sector by a wide margin, lost nearly -105,000 jobs in the month which is likely temporary due to the hurricanes.

Although the jobs losses headline is somewhat shocking, there were many signs pointing to economic strength. In a separate employment report released at the same time, the first is a survey of businesses and the second is a survey of households, it was reported that the unemployment rate surprisingly dropped from 4.4% to 4.2% and hourly wages jumping by 0.5%. The unemployment rate is the lowest since 2001.

The Institute for Supply Management reported their Manufacturing Index for September at the highest level in 13 years and far better than economists had predicted. There was some negative impact due to the hurricanes but this weakness was more than offset by strong new orders and continued strong production. The accompanying graph illustrates the strong trend in manufacturing during the past year and its push very close to 20-year highs.

Source: https://www.quandl.com/data/ISM/MAN_PMI-PMI-Composite-Index

Motor vehicle sales in September surged to an annual pace of 18.6 million. This was again well ahead of economist expectations and significantly impacted by the two hurricanes as people replace damaged vehicles. The trend in sales had been negative throughout 2017 so it is yet to be seen if this one month surge will persist into coming months.

These generally positive economic reports are expected to keep the Federal Reserve on track to raise interest rates later this year.

Economic Indicators – Upcoming

There will be two reports on inflation in the coming week. The first will be the Produce Price Index (PPI) which is a measure of wholesale inflation. The core rate, excluding food and energy, is estimated to increase by +0.2% with the overall rate expected at +0.4% due to higher energy prices. The second will be the Consumer Price Index (CPI). It too is expected to be higher by +0.2% when excluding food and energy.

Retails sales, one of the biggest components of the economy, will be reported for September with expectations that sales surged by +1.9%. This compares to the trend of the past few years that has averaged in the +0.2% range. This September report will be significantly impacted by the two hurricanes as consumers replace lost and damaged items. Excluding the impact of the hurricanes, the longer term trend is expected to remain intact at +0.2% for the month.

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