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IMPORTANT DISCLOSURE INFORMATION

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Markets End Quarter on a Choppy Note  

June 30, 2017 

**An unexpected decline in U.S. orders for business equipment in May indicates cooling capital-goods investment may weigh on second-quarter economic growth, Commerce Department data showed Monday. Orders for non-military capital goods excluding aircraft fell 0.2% (the estimate was for a 0.4% gain) after a 0.2% increase in the prior month. Shipments of those goods, which are used to calculate gross domestic product, fell 0.2% after 0.1% gain the prior month. Bookings for all durable goods fell 1.1% (the estimate was for a 0.6% drop) following 0.9% decline in the previous month.   Excluding transportation equipment demand, which is volatile, orders rose 0.1% (the estimate was for a 0.4% gain). The broad slowdown in equipment orders and shipments raises the risk that business investment will provide less of a boost than anticipated to the economic rebound this quarter, leaving the heavy lifting to household spending. The outlook for capital-goods production is clouded by cooling automobile sales, while overseas markets -- though improving -- are yet to show the kind of demand acceleration that would spur exports of U.S. made goods. In addition, some companies may be waiting for clarity on more favorable tax policies from Congress before stepping up investment. 

We had a couple of Fed governors giving speeches this week with comments that were worthy of note. New York Fed President William Dudley indicated that easier financial conditions support the Fed tightening policy. A muted market response to plans to shrink Federal Reserve’s balance sheet “suggests that these communications have generally been effective in fostering an orderly adjustment in expectations about how we are likely to normalize our balance sheet,” he went on to say. “Monetary policymakers need to take the evolution of financial conditions into consideration,” Dudley said in remarks delivered Sunday at the Bank for International Settlements’ Annual General Meeting, in Basel, Switzerland and posted online Monday. “For example, when financial conditions tighten sharply, this may mean that monetary policy may need to be tightened by less or even loosened. On the other hand, when financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation.” Additionally, Federal Reserve policy maker John Williams also spoke this week indicating he sees interest rates rising as inflation moves up. He made the case Monday for further gradual increases in interest rates, saying he expects inflation to rise to the central bank’s 2 percent target next year as unemployment edges lower. “Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time,” Williams said in remarks prepared for delivery at the University of Technology Sydney. The comments by the president of the Federal Reserve Bank of San Francisco suggest that he’s lining up with Fed Chair Janet Yellen, his predecessor at the bank, in an emerging debate on how to respond to an easing in inflation during the last few months. While some Fed officials have argued for a pause in the rate-hiking campaign to wait for clearer signs that inflation is indeed headed higher, Yellen has played down the significance of recent weak price data and suggested that the Fed remains on course for higher rates. Williams seemed to agree. “Some special transitory factors have been pulling inflation down,” he said. “But with some of these factors now waning, and with the economy doing well, I expect we’ll reach our 2 percent goal sometime next year.” 

Those special factors include a steep drop in the cost of mobile-phone services. That helped pull down the Fed’s favorite inflation gauge to 1.7 percent in April from 1.9 percent in March and 2.1 percent in February. Williams also saw a danger in the Fed allowing the unemployment rate to fall too far. “The very strong labor market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion,” he said. At 4.3 percent in May, the U.S. jobless rate was already below what Williams thinks is its long-run sustainable rate of 4.75 percent. And he sees it dropping some more. “Given the strong job growth we’ve been seeing in the United States, I expect the unemployment rate to edge down a bit further and remain a little above 4 percent through next year,” Williams said. The Fed earlier this month raised interest rates for the second time this year. Policy makers have penciled in one more rate increase for 2017 and three more for 2018, according to projections released after their June 13-14 meeting. Williams is not a voting member of the Federal Open Market Committee this year but will vote in 2018. Williams affirmed the Fed’s intention to begin trimming its $4.5 trillion balance sheet this year, saying the central bank would start off “nice and easy.” The aim will be to gradually reduce bond holdings in a widely telegraphed and predictable fashion, he said. “I hope I’ll not be perpetuating an unfair stereotype about economists if I say that ‘boring’ is a virtue,” Williams said. “Indeed, my new mantra is, ‘Boring is the new exciting.’”  It’s nice to see a Fed governor with a sense of humor! 

In European Central Bank news, Mario Draghi called for continued euro-area stimulus this week even as the economy enters a new phase in its upturn, saying support is still needed to entrench the trend. “All the signs now point to a strengthening and broadening recovery in the euro area -- deflationary forces have been replaced by reflationary ones,” the European Central Bank president said on Tuesday in Sintra, Portugal. “However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining. So for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy.” The comments at the annual ECB Forum reflect the intensifying public debate over whether the central bank should continue pumping liquidity into the financial system after more than four years of economic growth and improving resilience.  Policy makers didn’t use their latest policy meeting to discuss whether to wind down their 2.3 trillion-euro ($2.6 trillion) bond-buying program, which is scheduled to run until the end of this year, meaning investors may get relatively short notice of any change. The euro jumped as Draghi said that most factors damping inflation are temporary. The Governing Council used its June 8 meeting to say that risks to growth are now broadly balanced instead of tilted to the downside, and dropped its expectation that interest rates might be cut again. Draghi acknowledged that further changes in the policy stance are coming, but said they should be slow. “In the past, especially in times of global uncertainty, volatility in financial market prices has at times caused an unwarranted tightening of financial conditions,” he said. “So in the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary-policy parameters, even when accompanying the recovery. Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.” The ECB president did leave room for policy steps that would signal a reduction in the pace of stimulus, without necessarily tightening financial conditions. That could encourage more hawkish members of the Governing Council to push for action. “As the economy continues to recover, a constant policy stance will become more accommodative,” Draghi said. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments -- not in order to tighten the policy stance, but to keep it broadly unchanged.” We respect Mario Draghi and his position – traders seem to also have a great deal of confidence in his ability to lead the central bank. 

In other European news, euro-area economic confidence jumped to the highest level in a decade as the European Central Bank edged toward unwinding unprecedented stimulus. An index of executive and consumer sentiment rose to 111.1 in June from 109.2 in May, the European Commission in Brussels said Thursday.  The reading is the strongest since August 2007 and compares with a median estimate of 109.5 in a Bloomberg survey of economists. The report comes two days after ECB President Mario Draghi confounded investors by arguing that there’s room to adjust stimulus measures as the economy improves, even though he called for prudence and patience.  A gauge for private-sector activity signaled the euro-area economy recorded its fastest expansion in six years in the second quarter as business confidence in Germany hit a record and consumer sentiment in France surged. 

The job market continues to boost U.S. consumer confidence as expectations rise. An unexpected rebound in U.S. consumer confidence reflects a buoyant labor market and improved business conditions, though Americans are slightly less optimistic about where things will be in six months, data from the New York-based Conference Board showed Tuesday. The Confidence index rose to 118.9 (the estimate was for 116) from 117.6 in May. The present conditions measure increased to 146.3, highest since July 2001, from 140.6 the prior month. The gauge of consumer expectations for the next six months fell to 100.6, the lowest level since January, from 102.3 the previous month. Americans are drawing encouragement from an economy that continues to provide jobs, rising stock and home prices and steady pay gains, as the share of respondents expecting higher incomes was the second-highest since 2002. At the same time, the easing of the overall expectations index adds to other sentiment figures that suggest mounting skepticism about the ability of Washington lawmakers to enact economic policies that will drive growth. “Expectations for the short-term have eased somewhat, but are still upbeat,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement. “Overall, consumers anticipate the economy will continue expanding in the months ahead, but they do not foresee the pace of growth accelerating.” 

Sustained increases for home prices in 20 U.S. cities in April indicate the housing industry is juggling stable demand with a shortage of inventory, figures from S&P CoreLogic Case-Shiller showed Tuesday. The 20-city property values index rose 5.7% year-over-year (the estimate was for a 5.9% gain). The national price gauge increased 5.5% year-over-year. The seasonally adjusted 20-city index climbed 0.3% month-over-month (the estimate was for a 0.5% increase). Stubbornly low inventory in housing, particularly for more affordable properties, has helped drive steady home-price gains. While rising property values are helping cushion homeowners’ balance sheets, they also are inhibiting lower-end buyers, especially first-timers, from getting a piece of the action, as wage gains haven’t kept pace. At the same time, industry demand remains healthy, with solid job gains and low mortgage rates supporting purchases. “Since demand is exceeding supply and financing is available, there is nothing right now to keep prices from going up,” David Blitzer, chairman of the S&P index committee, said in a statement. “The supply of homes for sale has barely kept pace with demand and the inventory of new or existing homes for sale shrunk down to only a four-month supply. All 20 cities in the index showed year-over-year gains, led by a 12.9 percent advance in Seattle and a 9.3 percent rise in Portland, Oregon.  

The U.S. economy’s first-quarter growth was less tepid than previously reported, as consumer spending and trade added more to expansion, Commerce Department data showed Thursday. Gross domestic product rose at a 1.4% annualized rate (the forecast and previous estimate were for 1.2%). Consumer spending, the biggest part of the economy, rose 1.1% (the forecast and previous estimate were for 0.6%). Exports grew at a 7% rate, which was revised up from the prior estimate of 5.8% growth. While the revision was more positive than most analysts anticipated, the report still underlines a relatively weak start to the year, with consumer spending growing at the slowest pace since 2013.  Weather and other temporary factors in the period, along with rising wages and salaries, support the idea of a consumer-led rebound in the second quarter.  Federal Reserve policy makers raised interest rates earlier this month, seeing the first-quarter slowdown as transitory as the labor market improves further. The Commerce Department attributed the latest upward revision to spending data for financial services, insurance and health care.  Exports of industrial supplies and materials were higher than previously reported, boosting trade’s contribution to expansion in the period. Analysts estimate the U.S. economy will grow at a 3 percent rate in the April-to-June period, though the slowdown in equipment orders and shipments reported earlier this week raises the risk that business investment will provide less of a boost than anticipated.  Cooling automobile sales and a housing sector limited by a scarcity of affordable homes also remain headwinds for the economy this year. 

As always, stay tuned!

And the Winner Is...

 

President Trump will announce his pick to be the next Federal Reserve chairperson before a trip to Asia that starts on November 3.  The five finalists are: current Chairwoman Janet Yellen, Fed governor Jerome Powell, former Fed governor Kevin Warsh, National Economic Council Director Gary Cohn and Stanford University economist John Taylor.  Mr. Trump met with Ms. Yellen yesterday concluding his face-to-face meetings with all the candidates.  The nominee would serve on the powerful seven-member Fed Board of Governors if confirmed by the Senate.  Ms. Yellen’s current term expires in early February.  If she is not nominated, it will be the first time in almost four decades that a first-term president has replaced the sitting leader of the Fed. 

The markets are likely to be scanning the news wires for the next few weeks to try to determine who will be the winner.  In terms of ideology, Mr. Powell and Ms. Yellen have favored the current gradual rise in short-term rates.  Messrs. Walsh and Taylor, on the other hand, have been critical of the central bank’s “dovish” policies that have remained in place long after the bottom of the financial crisis has passed.  That does not mean that Mr. Powell could not become more ‘hawkish’ or Walsh or Taylor could not be more accepting of the go-it-slow pace.  The Fed Chairperson’s vote is crucial but it is one of seven on the board and one of many that convene during the regular Federal Open Market Committee meetings.  In the past we have read of governors who dissented with the majority and voted differently but were outnumbered.  The true worth of the Fed comes from the fact that it is an independent agency that is tasked with setting monetary policy based on two overriding mandates—attain stable prices and full employment.  There is latitude in those directives merely because of the multitude of meanings that can be attributed to price levels and measures of employment.  Do consumer prices matter more than wholesale prices? Are part-time workers considered not optimally employed?  The Fed is given flexibility to interpret the reams of data that are generated week after week in order to determine the appropriate course of action.  Regardless of who makes the appointment, the governors are expected to prioritize the mandate at all times regardless of politics.  The betting markets have Powell and Taylor in the lead but nothing is settled yet the president is likely to take input from numerous sources before making a final decision. 

Meanwhile the economy continues to hum along.  Existing home sales rose 0.7% in September according to the National Association of Realtors.  This partly reflects a rebound in the Houston area following Hurricane Harvey offset by declining sales in Florida as a result of Hurricane Irma.  The median sales price was up 4.2% year-over-year as a surge in the cost of building materials and shortage of construction labor will likely keep prices elevated.  Housing prices are outpacing income growth even as the labor market continues to show strength.  That may make it more challenging for prospective buyers in the coming months though they will be helped by interest rates which remain low in relative terms.  At the current pace, it would take 4.2 months to sell the homes on the market, unchanged for a fifth consecutive month.  Realtors consider less than five months on this metric as indicative of a tight or sellers’ market.  First time buyers comprised 29% of all sales, below the normal 40% share further emphasizing that as long as prices remain elevated, it will provide a headwind to more robust growth.  Overall, it was a positive report as the final number was in-line with consensus and there were some signs that rebuilding had begun in the south as the storm-related effects begin to dissipate. 



INDEX
  • And the Winner Is...
  • Inflation Mystery Continues
  • Employment Falls but Pay Rises
  • Yellen Affirms Fed Rate Hike Path While GOP Releases Tax Reform Blueprint
  • Time to Shrink
  • Economic Data Begins to Feel the Impact from Hurricane Harvey and Irma
  • Empty Chairs at the Fed
  • Market's Focus: Debt Ceiling and Jackson Hold
  • Fed Policy Makers Debate Inflation Outlook
  • Fed's Bullard Calls For Hold and Fed Rate Increases
  • Earnings Season Continues
  • Fed Leaves Rates Unchanged and Provides Guidance on Balance Sheet Reduction
  • Earnings Season Is Here
  • Janet Yellen Speaks and Markets Like What They Hear
  • Jobs, Jobs, Jobs
  • Markets End Quarter on a Choppy Note
  • Health Care Reform Vote Next Week
  • Fed Raises Rates as Expected
  • All Eyes On Fed Interest Rate Decision Next Week
  • Markets Set New Records
  • OPEC Meets as Markets Hover Near Records
  • Stocks Retreat, Bonds Rally on Concerns Administration's Pro-Growth Agenda will be Delayed
  • Economy Chugs Along as Earnings Season Slows
  • Fed Keeps Rates on Hold as Slowdown in Growth Deemed Temporary
  • Tax Reforms Released as Earnings Season Continues
  • All Eyes On Europe as Earnings Season Kicks into Gear
  • Earnings Season Begins
  • Payrolls Affected by Storm
  • Steigerwald, Gordon & Koch Weekly Blog 3/31/2017
  • Markets Chug Along
  • No Surprise: Fed Raises Rates
  • Jobs Galore
  • Fed Governors Send Strong Signal March Rate Hike Likely
  • Fed's Next Move in Focus
  • Steigerwald, Gordon & Koch Weekly Blog 2/17/2017
  • Earnings Season Continues
  • SGK Weekly Blog 2/3/2017
  • Earnings Season in Full Swing as Dow Hits 20000
  • Earnings Get Off to a Solid Start as the Economy Continues to Chug Along
  • Earnings Season Begins
  • SGK Weekly Blog 1/6/2017
  • Markets Book Eighth Consecutive Year of Gains
  • SGK Weekly Blog Dec. 23, 2016 - Happy Holidays!!
  • Fed Raises Rates and Markets Shoot Higher
  • SGK Blog--Update November 23, 2016: Happy Thanksgiving from All of Us at SGK Wealth Advisors!!