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Weekly Vantage Point | Week of 8.29.2016

 
Equities Slip on Double Rate Hike Concern

August 29, 2016 – U.S. stocks fell fractionally for a second week after Fed Chair Janet Yellen’s highly anticipated speech in Jackson Hole, Wyoming conveyed no new insights on when the central bank may raise interest rates. Yellen said the case to “raise interest rates has strengthened in recent months” as the economy approaches the central bank’s goals, but she refrained from discussing specific timing. However, following an hour-long rally after Yellen’s speech, Fed Vice Chair Stanley Fischer said in a CNBC interview that he saw Yellen’s comments were consistent with a September rate hike and a subsequent 2016 increase could follow as early as December. Fischer’s comments sent the S&P 500 tumbling 20-points and sparked a Friday jump in the implied odds for a September hike from 24% to 30%, and up to 42% by Monday morning.

In economic data, new home sales unexpectedly jumped over 12% in July to an almost nine-year high, while July existing home sales fell 3.2%, their first drop since February. Meanwhile, durable goods orders increased 4.4% last month, while orders for business equipment (a sub-set of durable goods orders) rose for a second month, up 1.6%, the most since January. On Friday, Commerce officials downwardly revised their estimate for second quarter GDP growth from 1.2% to 1.1%, while governmental data showed U.S. corporate profits fell 2.2% from year ago levels. Lastly, the University of Michigan’s final August reading of consumer confidence fell to a four-month low.

For the week, the S&P 500 slipped 0.67%, ending the week with its first three-day slide in two months. The Dow Industrials lost 0.85%, while the NASDAQ Composite edged 0.35% lower. Eight of the ten major sectors ended negative, with Utilities (-2.21%), Healthcare (-1.80%), and Energy (-1.34%) falling the most. Financial (+0.37%) and Technology (+0.05%) outperformed. Total trading volume slowed to an average of 5.8 billion per day last week, the slowest non-holiday weekly average since June 2015. The US Dollar Index strengthened last week, rising to 95.566. Crude oil futures fell by 3% last week, ending at $47.64/oz., while gold retreated 1.5%. Treasury prices also declined last week, pulling the yield on benchmark 10-year Treasury notes up 5.1 basis points to 1.630%.

 
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Week’s Economic Calendar
 

Monday, August 29: Personal Income & Outlays, Dallas Fed Mfg Survey;

Tuesday, August 30: S&P/Case-Shiller Home Prices, Consumer Confidence;

Wednesday, August 31: Mortgage Applications, ADP Private Jobs, Chicago PMI, Pending Home Sales;

Thursday, September 1: Jobless Claims, Productivity & Costs, Markit PMI Mfg, ISM Mfg, Construction Spending;

Friday, September 2: August Non-farm Payrolls, International Trade, Factory Orders.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -0.85% -0.20% 3.18% 5.57% 12.93%
S&P 500 -0.67% 0.0% 4.33% 7.67% 14.24%
NASDAQ -0.35% 1.26% 6.79% 5.13% 12.47%
Russell 3000 -0.57% 0.10% 4.78% 7.84% 13.26%
MSCI EAFE 0.18% 1.05% 2.50% 1.47% 2.68%
MSCI Emerging Markets -0.96% 3.35% 13.57% 15.52% 17.25%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.15% -0.43% 2.00% 5.52% 5.59%
Barclays Municipal 0.12% 0.15% 1.84% 4.55% 6.89%
Barclays US Corp High Yield 0.25% 2.03% 5.90% 14.27% 9.83%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -1.45% 0.86% -0.36% 8.38% 0.05%
S&P GSCI Crude Oil -2.99% 14.52% -3.72% 28.62% 23.37%
S&P GSCI Gold -1.51% -2.33% 8.44% 25.06% 17.86%
Source: Morningstar
Chart of the Week: Small-cap Stock Rotation Despite Hawkish Fed Rate View
 
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View larger image »
 

After digesting Fed Chair Janet Yellen’s speech at Jackson Hole, Wyoming on Friday, markets were encouraged that the economy was getting strong enough to endure a second rate hike in December, a full year after the first one. Then Vice Chair Fischer clarified that both September and December were in play. The equity markets’ intra-day price surge then folded like a poker player with an empty hand. Yet the S&P SmallCap 600 closed higher on the week, unlike its large-cap sibling. In the S&P Dow Indices chart above, we see the S&P SmallCap 600 Index most recently rising 1.16% month-to-date in August, whereas the S&P 500 is up just 0.04% (red line, essentially unchanged so far this month).

According to S&P Global Market Intelligence, several factors may explain this rotation: foremost of which is the current “Fishcher view” for more than one rate hike during the remainder of the year. This view, again according to S&P foreign yield-starved investors may be attracted to the heftier relative payout of U.S. fixed income, pushing up the value of the U.S. dollar, which would likely have a deleterious effect on U.S. exports. In the past 36 months, the S&P 500 has recorded a 0.72 monthly correlation with the U.S. Dollar Index (DXY) versus a correlation of 0.55 for the S&P SmallCap 600. And don’t think the Fed will be put off by an upcoming presidential election. The Fed has raised short-term rates six times in the third quarter of election years since WWII: 1948, 1956, 1980, 1988 and twice in 2004.

 
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The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.

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The Citigroup U.S. Economic Surprise Index is a weighted historical standard deviation measure of U.S. economic data surprises of actual data releases versus Bloomberg survey median levels. Calculated daily in a rolling three-month window, when the index is positive the reading suggests that economic releases have on balance [been] beating economists' consensus forecasts. The weights of economic indicators are derived from relative high-frequency spot foreign exchange impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.

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The S&P GSCI Crude Oil Index is a sub-index of the S&P GSCI and provides investors with a publicly available benchmark for investment performance in the crude oil market.

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West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

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