June 2017
Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Macro Overview

Political turmoil was not able to derail market momentum in May as the three major market indices continued on their upward trajectory. Delayed passage of stimulus driven legislation is reducing inflation expectations as markets anticipate an extended low rate environment.

The Federal Reserve Bank of Atlanta’s closely watched GDP Now forecast model is predicting second quarter economic growth of 3.4%, a generous number.

The equity market’s rise is broad with small, mid, and large capitalization stocks all rising in tandem, a healthy dynamic as noted by most analysts. As inflation expectations have fallen, the equity markets have been rising in hopes of a slower process of increasing rates by the Fed.

Globally, the price of commodities such as iron ore, copper and oil have fallen since the beginning of the year. A weaker dollar is also buoying emerging markets as their currencies rise to fend off inflationary pressures in emerging market economies.

Changes in banking rules and regulations may be in the air as the Trump Administration made its first major regulatory change, replacing the head of the Comptroller of the Currency, the banking industry’s primary regulatory entity.

The Republican led House of Representatives voted to repeal and replace the ACA (Affordable Care Act) with the American Health Care Act of 2017. The Act must now pass through the Senate in order to initiate any healthcare mandate changes. Congressional leaders reached a bipartisan agreement to fund the U.S. government through September. The omnibus spending measure provides nearly $1.2 trillion of funds until leaders meet again in the fall to formalize longer term spending provisions.

The Treasury department is exploring the issuance of longer term bonds maturing in 50 and 100 years. Current ultra low rates encourage debt issuance for longer periods of time.

Puerto Rico sought court protection in the largest ever U.S. municipality bankruptcy, owing over $72 billion to creditors, including Puerto Rican municipal bond holders. Detroit’s bankruptcy in 2013 amounted to $18 billion, which at the time was considered the largest municipality to go bankrupt. Moody’s & S&P credit rating agencies both downgraded the credit quality of Illinois state municipal bonds to one notch above junk status, giving it the lowest rating of all 50 states. Illinois state legislators’ impasse on passing a budget and spending cuts led to the downgrades.

The Fiduciary Rule goes into effect on June 9 after being postponed two months from its original effective date of April 10, 2017. Created by the Department of Labor two years ago, the Department’s definition of a fiduciary demands that advisors act in the best interests of their clients and to put their clients’ interests above their own. It leaves no room for advisors to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. All affected financial institutions will have until January 1, 2018 to fully comply. (Sources: Dept. of Labor, Fed, Moody’s, Reuters, Bloomberg)

 
U.S Oil Reserves & New Home Construction

U.S Oil Reserves At Record Highs – Oil Market Review

A recent proposal by the Trump Administration to sell a portion of the U.S. Strategic Oil Reserves has brought the subject to the forefront.

The higher level of oil reserves and supply over the past few months has led to a recent pullback in oil prices both domestically and internationally. The U.S. has become a dominant player in the global oil markets, becoming the 3rd largest producer of oil worldwide. The U.S. Energy Information Administration (EIA) estimates that U.S. production will reach 10 million barrels per day, surpassing Saudi production.  The increase in U.S. production is primarily attributable to American technology and skills created by U.S. drillers using hydraulic fracturing, also know as fracking.

Part of the downward pressure on oil prices has also been a lessening demand for oil by American consumers. Demand for imported oil has also fallen, as the U.S. reaches the highest production levels in over 45 years. Foreign oil imports now account for less than 21% of all U.S. consumption.

Source: EIA

Fewer New Homes Being Built – Housing Market Update

Construction of new single-family houses fell 2.5 percent in April 2017 from the prior month, according to the most recent data made available by the U.S. Department of Housing and Urban Development. The annual rate of 1,172,000 housing starts only in-creased by 0.7 percent over the past year, validating a dismal growth rate of new homes being constructed.

Fewer homes being built along with a slowly improving jobs market and growing fami-lies has helped escalate the demand for homes across the nation. As demand has been outstripping supply, home prices have been climbing across the country.

In addition, construction of new homes has been despondent as a lack of qualified work-ers has hindered the home building industry since the displacement of jobs during the real estate downturn following 2007. The challenge of hiring stems from skilled workers that left the industry during the downturn and have found other occupations since then.

Source: U.S. Department of Housing and Urban Development

 
We Don't See No Stinkin' Bubbles!

We Don’t See No Stinkin’ Bubbles!

Now that we’re eight years into a bull market, some investors just assume something has to go wrong.  As a result, we see lots of stories and get lots of questions about “bubbles,” as in “what market or sector is in a bubble already?”

Auto sales have been declining lately.  In eight of the last nine months (we have data through April), US sales of cars and light trucks have been lower than the same month in the prior year.  So some claim the auto sector must be a bubble that’s bursting.  But the real story is much more benign.

Fundamentals, like driving-age population growth and scrappage rates suggest autos should sell at about a 15.5 million annual rate.  Sales were below that level in 2008-12 (five straight years!).  Part of that problem was due to the recession in 2008-09.  But sales were unusually slow in 2010-12 and we see the above-trend pace of sales in 2014-16 as “catch up.”

Now we expect sales to gradually slow back down to a 15.5 million pace.  That’s not a bubble bursting, though.  It’s just the end of the catch up period.  Consumers will just buy other items instead.

Others claim home prices are getting frothy.  But using a price-to-rent ratio, national average prices are very close to the long-term norm relative to rents.  (We use asset values generated by the Federal Reserve and rent prices generated by the Commerce Department’s GDP statisticians.)  Regardless, home builders need to pick up the pace of construction or home prices and rents will accelerate.

Yes, household debts are at a new record high.  But household debts relative to assets are at one of the lowest points since 1990.

Is there a bubble in student loans?  We think many students are paying too much for college whether they’re paying for it with loans or up front.  So, yes, in a sense that’s a bubble, but it’s one directly caused by government policy which will saddle some students with debts they have trouble repaying and taxpayers with larger budget deficits.  But since so much of it runs through federal lending, defaults aren’t going to bring down the financial system.

Are stocks broadly overvalued?  Not even close.  Our capitalized profits model, which uses economy-wide profits, suggests the bull market has further to run even if interest rates move up substantially.  In December, we forecast the S&P would hit 2,700 by year-end 2017. A roughly 21% gain for 2017 seemed ambitious to many investors back then.  But, as of Friday’s close, we’re less than 12% away.

Eight years into the bull market in stocks, the only plausible bubble we see is that bonds are still too pricey.  For all the talk of bubbles, they just don’t seem to exist.

BrianS. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist

 
China Buying U.S. Treasuries Again

China Buying U.S. Treasuries Again – Global Fixed Income

Currently valued at over $13 trillion, the U.S. Treasury Bond market continues to be the world’s largest and most liquid bond market, attracting capital from foreign cen-tral banks seeking safety and stability.

Federal Reserve data as of May 17 shows that foreign central banks held nearly $3 trillion of the $13 trillion Treasury market, an increase of over $60 billion since the beginning of the year. Of the various foreign buyers, China’s central bank has in-creased its Treasury holdings the most by $29 billion to a total of $1.08 trillion. China is currently the second largest holder of Treasuries, with Japan the largest holder.

A reversal in the U.S. dollar has also helped propel buying by foreigners in order to help stabilize their local country currencies. U.S. Treasuries continue to offer higher yields than other developed country debt such as Japan or Germany, attracting yield seekers.

For the first time in almost 30 years, China’s government debt rating was lowered in May by one of the major credit reporting agencies, Moody’s. Such a move could di-minish China’s ability to borrow funds from domestic and foreign investors.

Source: Federal Reserve Foreign Holdings Report, Moody’s