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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!

Stocks Retreat, Bonds Rally on Concerns Administration's Pro-Growth Agenda will be Delayed

 

On Monday, U.S. stocks advanced to fresh records as a rally in crude and dollar weakness sparked gains in commodities producers. The S&P 500 Index climbed to a new intraday high as energy and materials shares rose more than 1 percent. West Texas Intermediate added 3 percent after Saudi Arabia and Russia said they’d extend a production-cut deal longer than expected.  The Australian and Canadian dollars, South African rand and Mexican peso were among the best performing major currencies. Saudi Arabian and Russian energy ministers stoked expectations that production cuts might be extended for as much as nine months. While output curbs that started Jan. 1 are working, global inventories aren’t yet at the level targeted by OPEC and its allies, Saudi Energy Minister Khalid Al-Falih said Monday in Beijing alongside his Russian counterpart, Alexander Novak. The ministers agreed the deal should be extended through the first quarter of 2018 at the same volume of reductions, they said. Basically, when Saudi Arabia and Russia come out together it sends a very strong signal to the market. With these two countries behind the extension of the accord, chances are very high that they will get all of OPEC behind it. Russia and Saudi Arabia, the largest of the 24 producers that agreed to cut supply for six months, are reaffirming their commitment to the deal amid growing doubts about its effectiveness so far. An increase in Libyan output, together with a surge in U.S. production and signs of recovery in Nigeria, may undercut OPEC’s strategy to re-balance the market and boost prices. Crude also got a boost from China’s sweeping plan to boost global infrastructure, though data showed the country’s factory output and investment slowed in April. Commodities have struggled for weeks as signs of a crude glut re-emerged and President Donald Trump struggled to get his infrastructure plan underway.  

U.S. home-price gains quickened in the first quarter as sales strengthened in a market starved for listings, the National Association of Realtors said. The national median price of a previously owned single- family home was $232,100, up 6.9 percent from a year earlier and the fastest growth in almost two years, the Realtors group said in a report Monday. The median in the fourth quarter gained 5.9 percent. Job growth is fueling demand for home purchases, pushing buyers into bidding wars for tight supplies of available properties. Sales -- including single-family homes and condos -- climbed 5 percent from the first quarter of 2016, the Realtors group said.  There were 1.83 million existing homes available for sale at the end of March, down 6.6 percent from a year earlier. “Prospective buyers poured into the market to start the year, and while their increased presence led to a boost in sales, new listings failed to keep up and hovered around record lows all quarter,” Lawrence Yun, the group’s chief economist, said in the report. “Those able to successfully buy most likely had to outbid others -– especially for those in the starter-home market -– which in turn quickened price growth.” In the first quarter, prices climbed in 85 percent of 178 metropolitan areas measured by the Realtors group. Prices declined in 25 regions. 

More confidence among U.S. home builders this month shows the industry remains optimistic demand will keep growing in the face of rising property values, according to data Monday from the National Association of Home Builders/Wells Fargo. The optimism for sales prospects boosted U.S. homebuilder sentiment as it rose to 70 for May, the second-highest since 2005, from 68 in April. The median forecast in a Bloomberg survey was for 68; readings greater than 50 indicate more respondents reported good market conditions. A measure of the six-month sales outlook climbed to 79 for May, the highest level since June 2005, from 75 in April. A pickup in current sales is keeping builders upbeat about the market’s prospects over the next six months. Lean inventory of previously owned properties is encouraging some interested buyers to look at the new-home market. Greater demand is also helping allay builder concerns about higher costs for building materials and shortages of labor and lots. Stronger sales and construction would help provide more of a push for the economy. Builder sentiment has climbed since the November election on hopes of reduced regulatory burdens. 

American factories flexed some muscle in April, boosting output by the most since February 2014 in broad fashion. Along with gains at mines and utilities, total industrial output was also the strongest in more than three years, Federal Reserve data showed Tuesday. Factory production rose 1 percent (the forecast called for a 0.4 percent gain) after a 0.4 percent drop in March. Total industrial production, which also includes mines and utilities, also increased 1 percent (the forecast was for a 0.4 percent gain) after a revised 0.4 percent gain. Capacity utilization, which measures the amount of a plant that is in use, climbed to 76.7 percent, the highest since August 2015, from 76.1 percent in the prior month (the forecast was for 76.3 percent). The jump in U.S. manufacturing was broad-based and included the largest surge motor vehicles and parts production since July 2015, according to the Fed. Output also picked up for consumer goods and business equipment, two sources of strength for the economy. With brighter global growth prospects, signs that businesses are more open to investment, and a firm labor market that’s underpinning consumer demand, output may stay strong in coming months. 

Unexpected declines in U.S. new-home construction and building permits in April indicate the market is off to a weak start this quarter, government data showed Tuesday. Residential starts fell 2.6% to a 1.17 million annualized rate (the forecast was for 1.26 million), which was the lowest since November, following revised 1.2 million pace in the prior month. Permits decreased 2.5% to a 1.23 million annualized pace (the forecast was for 1.27 million) from 1.26 million. The decline in starts was driven by a 9.2% drop in multifamily construction. The results indicate that residential construction is at risk of dragging down growth in the second quarter, lessening any economic rebound after weakness in the previous period. Other indicators of housing demand remain healthy, suggesting that part of the decline in starts and permits could be attributed to shortages of labor and ready-to-build lots, as well as unusually warm weather that may have moved up construction earlier in 2017. Steady hiring and healthier finances are likely to continue to drive home purchases in coming months, echoed by a rise in homebuilder confidence to the second-highest level since 2005. 

The drama surrounding President Donald Trump’s administration finally spilled into financial markets this week as on Wednesday U.S. stocks fell the most since March while measures of volatility moved higher and high quality bonds rallied. The theory being if the administration keeps getting mired in one self-induced crisis after another it will delay their agenda centering on tax reform, which is generally viewed as a positive by business people and investors. The dollar had fallen for a sixth consecutive day and the U.S. 10-year Treasury traded back around the 2.233% level. After a protracted period of dormancy, financial markets are beginning to react to developments in Washington in a more unified manner.  With stock and bond volatility muted, investors have looked for a clearer reaction to the political din in currency markets.  The U.S. currency now sits at its lowest level since the day of Trump’s shock win, a retracement some blame on perceptions his legislative agenda faces deeper challenges. Even here, though, traders have been divided on what is moving the U.S. currency, with some seeing catalysts beyond politics.  One explanation for the retreat might be weaker-than-expected readings on U.S. inflation and economic growth in the past month, data that have coincided with easing perceptions of political and economic risks in Europe.  While traders continue to price in two interest rate increases by the Federal Reserve this year, speculation is rising that European counterparts are preparing to withdraw their own stimulus measures. The political calibration the Fed has to make a determination on at some point is how much Trumponomics we are going to get that they can’t see yet. Even so, U.S. policymakers are in the mindset to raise interest rates as long as the markets are prepared for it, which they seem to be. 

By week’s end we had further good news with respect to oil prices. Crude markets are getting a little more encouragement as U.S. supplies fell for a sixth week in a sign that OPEC-led output cuts are starting to be felt in the world’s biggest oil-consuming nation. Inventories fell 1.75 million barrels last week to 520.8 million, the Energy Information Administration reported Wednesday -- less than the 2.67 million-barrel decline forecast by analysts surveyed by Bloomberg.  OPEC still has work to do as we noted above. They ultimately want the production cuts to pull inventories down.  These numbers show that slow progress is continuing. West Texas Intermediate for June delivery increased 63 cents to $49.29 a barrel at 11:21 a.m. on the New York Mercantile Exchange Wednesday immediately after the inventory report was released. U.S. supplies of crude are still near records and more than 100 million barrels higher than the five-year average for this time of the year, data compiled from the EIA show.  Crude production fell for the first time in 13 weeks, ending the longest stretch of gains since 2012. With production falling, inventories shrinking and demand likely to pick up here in the U.S. as we approach Memorial Day, it bodes well for price support at these levels. 

Finally, Thursday we received the weekly jobless claims report, which showed the U.S. labor market continues to demonstrate signs of tightening. Unemployment claims declined for the third straight week and benefit rolls matching the lowest level since 1973, Labor Department data indicated. Initial benefit filings decreased by 4,000 to 232,000 (the estimate was for 240,000k), which was the lowest since late February. Continuing claims fell by 22,000 to 1.898 million for the week. The four-week average of initial claims declined to 240,750 from 243,500 in the prior week. Hiring managers remain more occupied with finding workers than trimming staff, with the headline jobless rate drifting below the Federal Reserve’s estimate of full employment.  Benefit claims have been a particularly durable indicator of tightness in the labor market, with initial filings holding at lower than 300,000 for more than two years.  The gauge contributes to Fed policy makers’ case that the economy can withstand further increases in the benchmark interest rate this year. 

As always, stay tuned!



INDEX
  • Markets Steady As Government Shutdown Looms
  • Markets Set New Records
  • Tax Changes Approved
  • Jobs Growth Continues
  • Yellen to leave next year
  • House Passes Tax Reform Bill; Senate Up Next
  • Markets move sideways as earnings season continues
  • Earnings season continues as the Fed gets a new chief
  • Fed Chair Decision Coming Next Week
  • 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!!