Week in Review September 29, 2017
U.S. stocks recorded strong gains again in the third quarter, with the S&P 500 and NASDAQ ending September at record levels and the Dow Jones Industrial Average closing just below its all-time high.
Despite a relatively weak performance in September, when it gained 1.0% in price, about half as much as the Dow and S&P, NASDAQ was the best performer in Q3, rising 5.8% to boost its year-to-date increase to 20.7%. The Dow gained nearly 5% in Q3, raising its YTD gain to 13.4% in price, while the S&P was up 4.0% for the quarter and 12.5% for the year. Small-cap stocks, as measured by the Russell 2000 index, continued to rebound, rising 2.8% last week, their third straight weekly increase. The index gained 6.1% last month and is now up a respectable 10% for the year, a far cry from where it was just six weeks ago. Outside the U.S., the Stoxx Europe 600 gained 2.3% for the quarter in local currency terms and is up 7.4% for the year. Hong Kong stocks gained another 6.9% in Q3 despite a 1.5% loss in September and are up more than 25% in 2017.
Federal Reserve Chair Janet Yellen made some fairly hawkish comments last week, saying the Fed shouldn’t be deterred from raising interest rates and tightening monetary policy even if inflation remains stubbornly below the central bank’s target. Speaking at an economic conference in Cleveland, Yellen said, “It would be imprudent to keep monetary policy on hold until inflation is back to 2%.” And inflation remains well under that figure. The personal consumption expenditures index, the Fed’s main inflation gauge, rose a modest 0.2% in August, 1.4% annualized, while the core rate, which excludes food and energy, was up only 0.1% and 1.3%, respectively. Yellen also warned that “we should be wary of raising rates too gradually. Moving too slowly could create an inflationary problem down the road that might be difficult to overcome without triggering a recession.” The Fed has two more monetary policy meetings this year, with the market consensus expecting one more rate increase this year, most likely at the December 12-13 meeting. Treasury bond yields were higher last week but little changed for the quarter, with the yield on the benchmark 10-year Treasury note closing September at 2.33%.
The second and final revision of second quarter U.S. GDP showed the economy grew by an annual rate of 3.1%, the strongest performance in two years. Durable goods orders rose 1.7% in August, slightly better than expected, while core capital goods, a proxy for business spending, jumped 0.9%, well above expectations after climbing an upwardly revised 1.1% in July. But the housing sector remained stalled. The National Association of Realtors’ pending home sales index fell 2.6% in August to 106.3, its fifth decline in the past six months and its lowest reading since January 2016. “August was another month of declining contract activity because of the one-two punch of limited listings and home prices rising far above incomes,” said Lawrence Yun, the NAR’s chief economist. Purchases of newly built homes fell 3.4% to an annual rate of 560,000, the lowest rate since December, as the median sales price pushed over $300,000. Consumer spending rose 0.1% while personal incomes increased 0.2% in August, both in line with expectations. The Conference Board’s consumer confidence index fell slightly last month to 119.1 while the University of Michigan’s consumer sentiment index fell 1.7 points from the prior month to 95.1.
Reports/dates/facts/links worth paying attention to over the next week:
1. October 2: Institute for Supply Management manufacturing composite index for September; construction spending for August.
2. October 3: Motor vehicle sales for October.
3. October 4: ISM non-manufacturing composite index for September; ADP national employment report for September.
4. October 5: Weekly unemployment claims; factory orders for August.
5. October 6: Employment situation for September.