August 2017 Monthly Outlook

by on Sep 7, 2017

Economic Commentary:

The U.S. economy presented more mixed results than have been seen in the previous few months, though the overall picture still appears quite healthy. New home sales dropped 9.4% in July, while sales of previously owned dwellings dipped 1.3%. However, this shortfall does not reflected a lack of buying interest and the housing market is stronger than the numbers suggest. The declines resulted from dwindling inventory, with residences staying on the market for shorter periods of time, even as prices continued to climb. The picture is mixed elsewhere, with orders for durable goods falling in July (following a big gain in June) on weaker demand for civilian aircraft. That drop was partly countered by a gain in orders for defense-related capital goods. Other data showed a rise in consumer confidence and a notable upward revision in second-quarter GDP growth from 2.6% to 3.0%.  

The Conference Board Leading Economic Index® (LEI) increased 0.3% in July to 128.3, following a 0.6% increase in June.  “The U.S. LEI improved in July, suggesting the U.S. economy may experience further improvements in economic activity in the second half of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The large negative contribution from housing permits, a reversal from June, was more than offset by gains in the financial indicators, new orders and sentiment.” 

Indicators point to the U.S. economy accelerating in the short term and in the long term continuing a slow but steady growth rate of ~2% annually. We remain in the late stages of a long business up-cycle without major excesses that brought down some prior economic upturns.

Stock and Bond Commentary:

Last month was relatively uneventful for the U.S. markets, a departure from the impressive performance seen over the past 6 months. Stock returns were basically flat in August (0.29%) with all S&P 500 returns being attributed to dividends opposed to appreciation. Long term interest rates decreased 0.17% in August while bonds increased 0.94%. For the first time in several months, some volatility has crept into markets, which can largely be attributed to investor concerns surrounding escalating geo-political situations.

In August the technology and healthcare sectors continued their recent out-performance. Energy remains weak and further decreased by 5.48% in August. Despite the significant under-performance, there has been a short term rebound in energy with the recent hurricanes bringing down supply levels temporarily. We continue to be bearish on this sector because when oil prices rise, U.S. exploration companies increase production, effectively bringing prices back down and keeping them 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 (in 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. This will push 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.