July 2017 Monthly Outlook
The past few weeks have seen notable recoveries in housing starts and building permits (up 8.3% and 7.4%, respectively in June), causing stability in new and existing home sales, a solid upswing in consumer confidence, and a better-than-expected 0.6% increase in the leading economic indicators. This strength more than offsets sluggish sales at car dealers last month and some slippage at retail outlets. Importantly, these largely supportive trends were sustained while inflation was held securely in check. This stable outlook made it very easy for the Federal Reserve to keep interest rates unchanged, while suggesting it would begin winding down its stimulus program by selling a small portion of its Treasury Bond holdings. There are some longer-range questions that will need answers, however. Specifically, the Fed must still roll back years of historic monetary accommodation, a process that is delicate and risky, but necessary so it will have the wherewithal to fight the next recession.
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.6% in June to 127.8, following a 0.2% increase in May. “The U.S. LEI rose sharply in June, pointing to continued growth in the U.S. economy and perhaps even a moderate improvement in GDP growth in the second half of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The broad-based gain in the U.S. LEI was led by a large contribution from housing permits, which improved after several months of weakness.”
Indicators point to the U.S. economy accelerating in the short term and continuing a slow but steady long-term growth rate of ~2% annually.
Bond and Stock Market Commentary:
U.S. stocks returned a solid 2.06% in July to continue the momentum that started back in November 2016. Long term interest rates increased 0.02% and bonds increased 0.33% in July. Real estate increased 1.12% last month and has now increased 6.80% YTD. After several prior years of significant under-performance, international developed and emerging markets continue to outperform the U.S. in 2017 despite the solid performance from the U.S. markets.
Meanwhile, the corporate profit outlook is encouraging. As with the economy, the fundamentals are supportive with about 75% of companies reporting results have exceeded the consensus expectations so far this quarter. This profit performance is giving Wall Street’s optimists broad support.
In July, the technology sector rebounded with a 4.46% increase. Oil prices rebounded to nearly $50/per barrel, helping the energy sector do better. However, we remain bearish on this sector as whenever oil prices rise, U.S. exploration companies increase production, bringing prices back down effectively keeping oil and energy prices in a low range.
In the short term (1-3 years), until the Federal Reserve raises interest rates to a level that incentivizes investors to take less risk (vehicles like savings accounts, money markets, CD’s), investors will probably continue to put more funds into risky assets such as stocks and real estate, pushing up the price levels and valuations on these asset classes. Over the longer term, investment in businesses (i.e. stocks) should provide superior returns to all other classes.