Week in Review June 30, 2017
Stocks were mostly lower last week but finished the first half of 2017 with strong gains.
NASDAQ fell 2.0% for the week, its biggest weekly loss this year and its third loss in the past four weeks, but ended the first half up more than 14% in price. Both the Dow and the S&P 500 closed the first half up more than 9% after falling slightly last week. Small-cap stocks, as measured by the Russell 2000, were up slightly last week to finish the first half with a 4.6% gain. By contrast, in 2016 NASDAQ was the worst performer among the three major indexes, returning more than 8%, while small-cap stocks returned well over 20%.
European stocks also had their worst week of the year as European Central Bank President Mario Draghi hinted that the ECB was about to start rolling back its easy monetary policy and asset purchases. The Stoxx Europe 600 lost more than 2% on the week, its fourth straight weekly loss, ending the first half with a 5% gain in local currency price terms. The euro was up 2% for the week and has gained nearly 9% against the dollar so far this year. Draghi’s comments – subtle though they were – created a lot of havoc in the sovereign bond market, where prices dropped and yields soared. In the U.S., for example, the yield on the benchmark 10-year Treasury note rose 16 basis points to end the week at 2.30%. In Europe, the yield on the 10-year German bund jumped 21 bps to 0.47%, its highest level in more than two months. In commodities, oil prices rose for the first time in six weeks, rising 7% but down more than 14% for the year to date.
U.S. economic reports continued to come in weak. First quarter U.S. GDP was revised higher but still came in at a tepid annual rate of 1.4%. Corporate profits in the quarter were up 11.5%. The Chicago Fed’s national activity index fell back into negative territory in May at -0.26%, down from the prior month’s upwardly revised reading of positive 0.57. Durable goods orders fell a deeper than expected 1.1%, the biggest decline in six months, but even excluding the volatile transportation sector, orders were up only 0.1%, well below forecasts. Core capital goods, which measures business investment in new equipment, fell 0.2%.
Consumer spending rose a modest 0.1% in May after rising by 0.4% in each of the two previous months. On the plus side, personal income rose 0.4%, boosting the personal savings rate to 5.5%, its highest level in eight months. The same report showed the personal-consumption expenditures index, the Federal Reserve’s main inflation gauge, fell 0.1%. The core index, which excludeds food and energy, rose 0.1%, 1.4% on a year-to-year basis, well below the Fed’s 2.0% target. But consumer confidence readings were higher. The Conference Board’s index rose more than a point to 118.9 in June, well above expectations, while the University of Michigan’s consumer sentiment index ended the month at 95.1, up about a half-point from the prior month. Pending home sales fell for the third month in a row, falling 0.8% in May while April’s decline was revised further downward to 1.7%. “This third consecutive decline in contract activity implies a possible topping off in sales,” said Lawrence Yun, the National Association of Realtors’ chief economist. “Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast.”
Reports/dates/facts/links worth paying attention to over the next week:
1. July 3: Institute for Supply Management manufacturing composite index for June; construction spending for May; motor vehicle sales for June.
2. July 4: U.S. markets closed for Independence Day.
3. July 5: Factory orders for May; minutes of the Federal Reserve’s June 13-14 meeting are released.
4. July 6: Weekly unemployment claims; ADP national employment report for June; ISM non- manufacturing index for June.
5. July 7: Employment situation for June.