In the markets:
Stocks ended the week modestly higher despite elevated volatility. The Dow Jones Industrial Average
ended the week up +38 points to close at 18,123. The tech-heavy NASDAQ surged +2.3%, up +118
points to 5,244 (mainly on the back of a big winning week for Apple, which is the most-heavily weighted
stock in the NASDAQ index). Most other major indexes were up with LargeCaps showing relative
strength over their smaller peers. The S&P 500 LargeCap index rose +0.5%, while the S&P 400 MidCap
index fell -0.48%, and the SmallCap Russell 2000 ended the week up +0.46%.
In international markets, Canada’s TSX was off -0.6%, while in Europe major markets were red across the
board. The United Kingdom’s FTSE declined -0.98%. On Europe’s mainland France’s CAC 40 dropped
sharply, down -3.5%, Germany’s DAX fell -2.8%, and Italy’s Milan FTSE plunged -5.6% as worries over
Italy’s financial sector continued. Markets in Asia were also red: Hong Kong’s Hang Seng index fell 3.2%, Japan’s Nikkei dropped -2.6%, and China’s Shanghai Composite was off -2.8%. In broader terms,
developed markets as tracked by the ETF ‘EFA’ were down -1.78%, while emerging markets as tracked
by ‘EEM’ were down -0.54%.
In commodities, strength in the U.S. dollar weighed on precious metals and energy. Gold fell $24.30 an
ounce to $1310.20, down -1.8%. Silver, likewise, was off down -2.6% to $18.86 an ounce. Oil plunged 4.9% to $43.62 a barrel for West Texas Intermediate crude oil after statements from the International
Energy Agency and OPEC indicated that elevated inventories are likely to keep the price of oil near
current levels until 2018. The industrial metal copper had a strong week, up +3.2%.
In U.S. economic news, the number of people who applied for unemployment benefits last week rose
slightly to 260,000. The number remains below the key threshold of 300,000, and is still near the lowest
level in decades. Economists had expected a rise to 265,000. As the labor market continues to tighten,
companies are increasingly complaining that they cannot find enough skilled workers. The smoothed
four week average of new jobless claims rose +500 to 260,750, according to the Labor Department.
Continuing jobless claims, those already receiving unemployment benefits rose by 1,000 to 2.1 million in
the first week of September. All figures are seasonally adjusted.
A measure of sentiment of small business owners declined in August as owners became more cautious
leading up to the election. The National Federation of Independent Business (NFIB) small business
optimism index fell -0.2 points to 94.4. The most dramatic change was in the outlook for business
conditions in the next six months, which declined -7 points. In addition, 38% of business owners in the
NFIB survey cited the political climate as a reason not to expand - an all-time high for the survey.
Consumer sentiment remained flat at 89.5, according to the University of Michigan’s consumer
sentiment index. Economists had forecast a slight improvement to 90.5. Consumer’s assessment of the
present weakened slightly while future expectations rose. Richard Curtin, the survey’s chief economist
stated “Small and offsetting changes have taken place in the third quarter 2016 surveys: modest gains in
the outlook for the national economy have been offset by small declines in income prospects as well as
buying plans.” Curtin stated the reason expectations improved was to be found in the decline in stated
inflation expectations for the future.
U.S. retail sales fell in August for the first time in five months as most stores reported a drop in traffic.
The decline of -0.3% missed estimates of a -0.1% decline. Lately the report has been mixed as online
retailers have had solid performance, while more traditional sellers such as department stores have
fared poorly. However, August’s report showed that sales for Internet sellers and mail order companies
fell for the first time since the beginning of 2015. Only restaurants and apparel stores showed much
strength, up +0.9% and +0.7%, respectively. Despite the relatively weak report, economists continue to
predict that improved finances of American households will help increase spending in the last quarter of
2016.
Higher rent and surging medical costs are putting a dent in the wallets of Americans, according to the
latest Consumer Price Index (CPI) data. The CPI rose +0.2% last month due to the rising costs of housing
and medical care. Medical care costs rose +1%, the fastest rate since 1984, while prescription drugs
soared +1.3% according to the Labor Department. Excluding the volatile food and energy categories, the
so-called core consumer prices rose +0.3%. The rising costs of housing and healthcare has been at least
somewhat offset by lower prices for food and energy.
Two closely watched U.S. regional manufacturing gauges both improved in September. The Empire
State manufacturing index, which measures conditions in the New York area, remained in contraction
but improved to -2 from -4.2. Factories in New York reported fewer new orders, lower shipments and
reduced staffing levels, consistent with a contraction reading. In the city of brotherly love, the
Philadelphia Fed Business Index jumped to 12.8, up 10.8 points from a month earlier. New orders
improved, rising from -7.2 to +1.4 and the percentage of firms reporting increases in new orders edged
up to 30%, up +3% from last month.
But the Federal Reserve reported that industrial output weakened in August, declining -0.4%. The
decline was worse than the -0.2% drop expected. On an annual basis, industrial production fell -1.1% in
the 12 months through August. Over the year, manufacturing output was down -0.4% and mining
output plunged -9.3%. The mining sector includes oil and gas extraction, which has been hurt by the low
price of oil.
The federal government ran a budget deficit of $107 billion last month according to the Treasury
Department $43 billion more than the same time last year. The government spent $338 billion last
month, up 23% from August 2015. Increase spending for veterans’ programs and Medicare contributed
to the rise. Total receipts for August were up 10% to $231 billion and up 1% for the fiscal year to date.
Steve Blitz, chief economist at M Science LLC in New York notes, “This deficit has effectively been on a
widening trend since the beginning of this year. We know that the current recovery has failed to create
the same growth in nominal incomes as the prior ones, and it is becoming evident in the inability of the
primary deficit to get to zero even during this expansion.”
In Canada, the Royal Bank of Canada said the economy will snap back as rising energy prices, low
interest rates, and federal stimulus will help economic growth. The bank said it is looking for real
annualized growth in GDP of +3.7% in the 3rd quarter as rebuilding takes place in Alberta following the
devastating wildfire. The bank is anticipating a +1.9% rise in the 4th quarter. Hurt by the fire and weak
exports, the Canadian economy shrank -1.6% on an annualized basis in the second quarter—the largest
quarterly decline since 2009.
In the United Kingdom, the Bank of England held interest rates steady in the wake of recent upbeat
economic activity. The move, or lack thereof, was widely expected. The Bank’s Monetary Policy
Committee lowered the UK base rate to a record low 0.25% in August to help cushion the effects of
Brexit on the economy. This month, the bank voted unanimously to leave interest rates on hold and
also voted to continue with its monthly bond buying purchases of 435 billion pounds of UK government
bonds and 10 billion pounds of corporate bonds.
German Vice Chancellor and Economic Affairs Minister Sigmar Gabriel will visit Russia next week to hold
talks with Russian officials about the state of bilateral trade relations. The Ministry for Economic Affairs
and Energy stated Gabriel was making his visit at a time when trade between Russia and Germany was
declining because of weakness in the Russian economy and the low buying power of the ruble. Trade
between the two countries fell -13.7% in the first half of the year compared to a year earlier and
German exports to Russia were also down.
China’s economy strengthened last month following government infrastructure spending and property
sales. A slew of data from factory output to retail sales showed activity rebounding in August following
a difficult summer. China’s National Bureau of Statistics reported that industrial output rose +6.3% last
month from a year earlier, and up +0.3% from July - both beating expectations. Investment in buildings
and other fixed assets outside rural households climbed a better-than-expected +8.1% from the
previous year in the first 8 months of 2016.
The Bank of Japan is preparing to expand its monetary stimulus even further as the economy remains
mired in lackluster economic growth. Of concern is that the yen is considered a ‘safe haven’ currency
that attracts foreign capital, which in turn drives up the price of Japanese exports. The central bank has
repeatedly tried the help Japan’s international trade-reliant economy with “liquidity injections”;
however, improvements in the economy perversely drive up the prices of Japanese goods overseas. But
if the BOJ attempts to put downward pressure on the yen by lowering interest rates, it lowers borrowing
costs making the economy more attractive to foreign investors, raising the yen and the cycle continues.
This persistent catch-22 has remained a thorn in the side of BOJ officials attempting to spur the
Japanese economy to steady growth. Despite nearly $800 billion of bonds being purchased annually,
plus billions of dollars’ worth of exchange trade funds, economic growth remains stagnant while the yen
has been on a tear—the opposite of the desired effect. Japan’s stock market is down -12.7% so far this
year.
Finally, there is evidence that 6 years into the economic recovery from the financial crisis, ordinary
Americans are finally seeing an improvement in their household incomes.
Data from the Census Department show that middle-class household incomes are growing at the fastest
rate since the Great Recession. Even better, the strongest gains were noted among the lower-income
groups, as can be seen on the chart below which illustrates the greatest percentage increase in real
household income growth came in the lowest two income percentile groups.
Larry Mishel, President of the Economic Policy Institute, stated the data was “superb in almost every
dimension.” Income data had been “submerged” for many years he noted. “This one year almost
single-handedly got us out of the hole. That’s worth celebrating.”
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)