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IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Steigerwald, Gordon & Koch, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Steigerwald, Gordon & Koch, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Steigerwald, Gordon & Koch, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Steigerwald, Gordon & Koch, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Steigerwald, Gordon & Koch, Inc. does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Steigerwald, Gordon & Koch, Inc.’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

 

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!

SGK Weekly Blog 1/6/2017

 

Happy New Year from All of Us at SGK Wealth Advisors! 

January 6, 2017 

The Fed December meeting minutes was the big story this week. Federal Reserve officials focused on the impact of potential fiscal stimulus during their December policy meeting, with many starting to worry that the central bank might eventually be forced to quicken the pace of interest-rate increases to head off higher inflation. Almost all the participants “indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,” read the minutes of the Dec. 13-14 meeting of the Federal Open Market Committee, released Wednesday in Washington. Despite growing attention to the risks of increased government spending and tax cuts spurring faster growth than currently forecast, most on the committee reiterated that a “gradual” pace of rate hikes over the coming years would likely remain appropriate. Traders see a rate hike by June as highly likely, according to prices of federal funds futures, which were little changed after the minutes were released. The minutes of the session, at which officials raised their benchmark lending rate by a quarter percentage point, showed that uncertainties over future fiscal policies weighed heavily in their discussion of the economy and the future path of monetary policy. President-elect Donald Trump promised higher spending on infrastructure, tax cuts and regulatory reform during his campaign, but has offered few new details of his policy goals since winning the Nov. 8 election.  His inauguration is set for Jan. 20. 

“Participants emphasized their considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said. The committee, headed by Chair Janet Yellen, was divided on how far the unemployment rate was likely to fall, and over the consequences for inflation if it fell significantly below the Fed’s goal. “Many participants” judged the risks of a sizable undershoot on unemployment had increased somewhat, according to the minutes, “and that the committee might need to raise the federal funds rate more quickly than currently anticipated.” Still, “most participants” expected the jobless rate would fall only “modestly below their estimates of the longer-run normal rate.” The minutes showed that “about half” of the committee members had begun to incorporate assumptions about expansionary fiscal policy into their forecasts. Among officials still emphasizing the downside risks to the economy, some mentioned repeatedly the headwind created by an appreciating dollar. 

The U.S. currency has surged since the election, partly in anticipation of fiscal policies under the incoming Trump administration.  The Bloomberg Dollar Spot Index, which measures the greenback against 10 global currencies, had appreciated 5.2 percent between Nov. 8 and the end of FOMC’s meeting on Dec. 14. Since then it has strengthened an additional 1.1 percent. A stronger dollar hurts growth by making U.S. exports less competitive and slows inflation by making imports cheaper. At their December meeting, officials raised the number of quarter-point rate hikes they foresee in 2017, to three from two, while signaling growing confidence in the economy, according to their median estimate. Unemployment declined to 4.6 percent in November, its lowest level in more than nine years and close to most economists’ estimates for the its lowest sustainable level.  The Fed’s preferred measure of price inflation was 1.6 percent in the 12 months through November after excluding food and energy components. Policy makers expect that to rise this year toward their 2 percent goal. The FOMC holds eight scheduled meetings a year, with the next session slated for Jan. 31-Feb. 1. 

Filings for U.S. unemployment benefits declined to the lowest level in eight weeks, showing volatility typical around the holiday period. Jobless claims dropped by 28,000 to 235,000 in the week ended Dec. 31, a Labor Department report showed Thursday in Washington.  The median projection of economists surveyed by Bloomberg called for 260,000. While the figures usually show swings around the year-end holidays, firms have generally avoided firings as the job market tightens and the supply of available workers shrinks.  Employers probably continued to add staffers at a solid pace last month, analysts estimated ahead of data due Friday from the Labor Department. Filings have remained below 300,000 for 96 consecutive weeks, the longest streak since 1970 and a threshold economists say is indicative of a healthy labor market.  An average 263,000 Americans filed for benefits each week in 2016, down from 278,000 in 2015. 

America’s service providers expanded more than forecast last month, spurred by an upturn in orders that coincided with stepped-up demand at the nation’s factories. The Institute for Supply Management said Thursday that its non-manufacturing index held at 57.2 in December, the highest level since October 2015.  The median forecast in a Bloomberg survey called for 56.8.  Readings above 50 signal growth in the industries that make up nearly 90 percent of the economy. Bookings at service producers were the strongest since August 2015, helping explain a pickup in business sentiment about the economy since the presidential election in November. The ISM’s measure of service-related business activity, which parallels manufacturing output, was near the highest in more than a year. “We have a very strong finish to 2016,” Anthony Nieves, chairman of the ISM non-manufacturing survey, said on a conference call with reporters.  After the year-end holidays, “there tends to be a little lull or pullback, but when we look at the new orders index remaining strong, I’d be hard-pressed to see how much it may come off, if at all.” Earlier this week, the Tempe, Arizona-based supply management group said that its index of manufacturing reached a two-year high last month, powered by the biggest monthly increase in orders growth since August 2009. Together, the reports indicate the economy will gain momentum in 2017 after a projected soft fourth quarter as American industry prepares for a change in government leadership.  President-elect Donald Trump has said he aims to boost economic growth and increase hiring by taxing less and reducing regulations. The ISM services survey covers a range of industries, including retail, health care, agriculture and construction. 

On Friday we saw the release of the employment report for December. The U.S. labor market turned in a solid performance at the end of 2016, putting job gains above 2 million for a sixth year as paychecks rose by the most during the current expansion. The 156,000 increase in December payrolls followed a 204,000 rise in November that was bigger than previously estimated, a Labor Department report showed Friday in Washington.  The median forecast in a Bloomberg survey of economists called for a 175,000 advance.  The jobless rate ticked up to 4.7 percent as the labor force grew, and wages rose 2.9 percent from December 2015. Worker shortages may become more frequent in the coming year, which means employers could have to give out bigger wage hikes even as hiring cools.  The data underscore a job market that will continue to buoy consumer spending in 2017, with Federal Reserve officials deeming the situation at or close to full employment. The December results were helped by more hiring in health care and social assistance, whose gain of 63,300 workers was the most since October 2015.  Factories added employees, along with leisure and hospitality businesses. Revisions to prior reports added a total of 19,000 jobs to payrolls in the previous two months. The latest payrolls tally brought the advance for 2016 to 2.16 million, after a gain of about 2.7 million in 2015.  The streak of gains above 2 million is the longest since 1999, when Bill Clinton was president. 

In European news, euro-area economic confidence jumped to the highest since 2011 at the end of last year after the European Central Bank extended its stimulus and the recovery in the 19-nation region showed further signs of strengthening. An index of executive and consumer sentiment increased to 107.8 in December from a revised 106.6 in November, the European Commission in Brussels said on Friday.  That’s the strongest reading since March 2011 and compares with a forecast of 106.8 in a Bloomberg survey. Economic momentum accelerated at the end of last year to the fastest in more than 5 1/2 years, according to a survey of purchasing managers, as the ECB extended quantitative easing to ensure a sustained pickup in inflation in a year of political uncertainty.  While a surge in the cost of oil propelled consumer-price growth to the strongest in more than three years in December, underlying inflation pressures remained weak. “In industry, we see a good recovery, both in Germany, where several industrial indicators have risen, as well as in the peripheral countries,” said Daniel Hartmann, an economist at Bantleon Bank in Zug, Switzerland.  While rising oil prices may weigh on the economy, the global economic environment is positive, and “we continue to have tail winds from monetary policy.” The euro was little changed after the report and traded at $1.0600 at 11:15 a.m. Frankfurt time Friday. 

As always, stay tuned!



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