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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!

Earnings season continues as the Fed gets a new chief

 

During its regularly scheduled Federal Open Market Committee meeting, the voting members of the Fed decided to leave interest rates unchanged.  In its statement, the Fed highlighted: “Economic activity has been rising at a solid rate despite hurricane-related disruptions.”  The central bank’s vote was unanimous as the key fed funds benchmark stayed between 1.00%-1.25%.  Importantly, there was nothing stated that would suggest that the Fed is not on track to bump up that rate by 0.25% when they meet for the final time in 2017 on December 13.  Probability for a hike is close to 90% and when it has been this high in the past, it is a virtual certainty to occur.  That meeting will be followed by a conference call where current Chairwoman Janet Yellen can explain any changes in rates or policy outlook.   

What she will not have to explain is how the Fed will be run for the next four years under her leadership as President Trump has nominated current Fed governor Jerome Powell as the next head of the central bank—the 16th chairman of the Federal Reserve.  Mr. Powell has spent a 40-year career in government, law and banking and is viewed as largely continuing the policies and path of his predecessor.  While a member of the Fed, he has never voted against the majority.  It would be safe to characterize him in the same vein as Yellen and Ben Bernanke before her—a consensus builder.  Though it may be a matter of degree, in the staid world of economists, chairmen like Paul Volcker and Alan Greenspan were seen as commanding personalities.  They set the tone and everyone else fell in line.  Starting with Bernanke, the Fed’s voice changed.  With Congress more attuned to who was making multi-trillion dollar decisions and why, the Federal Reserve began a transformation to a more transparent, communicative body rather than a black box.  In that not too distant past, nobody knew what the Fed had decided at their meetings until they started making trades in the open market the afternoon or day after their meetings.  A conference call with reporters?  Unthinkable.  And why would anyone question the wisdom of the nation’s greatest economists and bankers?  Thankfully, those days are gone and though we are not privy to being a fly on the wall during the meetings, that governing body is more open than it has ever been in its history.  Powell is likely to continue in this vein and may be more flexible on the regulatory front than his forerunners.  That would likely satisfy Trump’s agenda:  keep rates low and loosen the noose on regulation.  With Randal Quarles taking office last month as an appointee, Trump has three more seats to fill on the powerful seven-member board of governors.  Yellen’s term as a governor does not expire until 2024 so there is the possibility of her staying on.  Though she may remain temporarily so that there is not another empty seat once her term as chairwoman ends next February, it is unlikely she would want to stay for six more years in the group.  Though both the chairman and to-be-named vice chair must be approved by the Senate still, outside a few Senators with an axe to grind, it is likely to happen with little fuss.  Thus, for now, the market can breathe a little easier with that uncertainty removed and a radical change in philosophy avoided.   

The long-awaited details of the GOP tax reform package were unveiled this week.  In terms of how these proposed changes will affect the average citizen, the debate is likely to rage on.  This is just the beginning of a process which will involve committee meetings in the House as well as the Senate’s own version of reform.  With the Republicans clinging to a smaller majority in the Senate, their version of reform may be quite different than the House’s in order to win the votes needed to pass.  What both chambers of Congress have agreed upon is that the final proposal, the one that is signed into law by President Trump, will not raise the deficit over the next 10 years by more than $1.5 trillion.  Thus, what is left to quibble about are the final onerous, nitty gritty details of exactly what gets changed and what does not.  We will not use this space to examine the changes in the various brackets or child tax credit adjustments.  Though we do not offer tax advice, our financial planning staff is standing by ready answer whatever questions you may have as they pertain to how changes may affect your individual situation. 

This newsletter will focus on the bigger picture and how it will affect the markets in general.  The Tax Cuts and Jobs Act proposes a permanent cut in the corporate tax rate to 20%.  That is good news because it is a nice haircut from the current 35% rate and it would be immediate, not phased in over a few years like some reports had suggested.  Another boost to the bottom line would come in the immediate deductibility of capital investments such as factories and machineries.  Currently, firms must depreciate those expenses over the useful life of the asset—many years in the case of buildings and other large structures.  An immediate write-off would lead to higher short-term expenses on the balance sheet but unencumber future reporting periods as the asset continues to generate income.  Though a higher-than-expected proposed rate of 12% for a one-time repatriation of cash held by foreign subsidiaries of U.S. companies will not result in a sudden boost of monies to U.S. shores, the overall tone is decidedly positive to corporate America. 

So when the details were released the market…shrugged.  Why?  Many large, multinational firms already pay effective tax rates not much above 20%.  Goldman Sachs estimated recently that the S&P 500 as a whole pays around 28% so a 20% statutory rate would help some but it’s not like every one of those 500 firms are getting a windfall.  Moreover, smaller more domestically focused firms will benefit more which is why the small-cap focused indices traded slightly higher than their large-cap brethren yesterday.  The bigger issue, in fact THE issue, is that a tax reform package is meant to unlock higher economic growth.  While corporate America on the whole sees the benefits, the milder adjustments on the individual side removes some of the big bang some were anticipating.  If some people get a break while others do not maybe because of where they live, the follow-through to higher consumer spending, which comprises two thirds of real gross domestic product, becomes dubious and merits…a shrug.     

The monthly payroll report from the Labor Department showed that the economy is rebounding well from the hurricanes that hit during the fall.  Employers added the most workers in a year with nonfarm payrolls rising 261,000 in October with revisions to the August and September figures adding another 90,000 combined to those months.  The unemployment rate, derived from a survey of households versus the employer-focused payroll number, fell to 4.1% nationally, below the estimate of 4.2% which was the figure for last month.  The key average hourly earnings number, which gives Fed policy makers a view on inflationary pressure, showed little change, up 2.4% year-over-year, below the 2.7% expected by economists.  With the average workweek unchanged at 34.4 hours, people are not working more for less, but there are less people overall working.  The participation rate, which shows the working-age people in the labor force, fell from 63.1% to 62.7%.  Overall, consumers are more upbeat about the job market and more willing to spend based on various surveys.  The U-6 underemployment rate measures those part-time workers who would prefer a full-time position and people who want a job but are not actively looking.  That number fell to 7.9%, the lowest since December 2006.  With payroll growth averaging 162,000 over the past three months, there remains little in the way of labor data to prevent the Fed from hiking next month.  There will be one more report due next month, but absent something totally abnormal, the trend has been that the twin effects of hurricanes Harvey and Irma have not left a lasting headwind to economic expansion and inflation has risen, just barely, enough to merit further tightening.   

Overseas, the Bank of England increased its benchmark interest rate on Thursday.  This is notable because it is the first hike by that central bank in a decade.  The British economy will be closely watched because it is the first step they have taken to remove crisis-era stimulus.  Ironically, the British pound fell in response.  Usually a rate hike signals that the interest earned in that denomination will become more valuable; hence leading to a higher demand for it.  However, the central bank said that further tightening of monetary policy would be gradual and limited with only two more 0.25% hikes expected between now and the end of 2020.  Such a cautious tone sent traders to other currencies where they may get more bang for the buck/euro/looney/yen.  With the Fed signaling a move next month—the fifth rate increase since 2015—and the European Central Bank last week confirming it will dial back its quantitative easing program, the era of “easy money” is slowly but surely coming to a close.  Bank of England governor Mark Carney said, “The global economy is firing on most cylinders, it’s doing very well.  It’s not surprising that the stance of policy is changing.”  The additional twist for the U.K. is, of course, related to the Brexit vote of last year.  London and Brussels are due to meet on fresh divorce talks next week with the U.K. scheduled to leave the European Union in March 2019.  The British government estimated that its potential growth rate post-Brexit was about 1.5%, much lower than the 2.0%-2.25% the economy produced before the global financial crisis.  The last time the Bank of England raised rates was in July 2007 which was soon reversed as the Great Recession began to move across the global shortly thereafter.     

 



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!!