Post Oak Private Wealth Advisors
Monthly Economic Update | July 2017
Summary: The second half of 2017 began with more of the same for the U.S. markets and economy—stocks still hovered at record levels, economic growth remained modest, and the Fed re-affirmed their commitment to moving away from easy money.
The Economy: The U.S. economic expansion entered its 9th year, but the slow pace of growth over this time has not given U.S. investors much to cheer about. The 2.1% annualized GDP growth rate since 2009 represents the most modest economic expansion since WWII. (See chart below.) The first estimate of Q2 GDP growth was a little more promising, coming in at an annual rate of 2.6% for the quarter. That was a good improvement over the 1.2% annual rate of GDP growth for Q1. The employment markets remain a bright spot for the U.S. economy, with the Labor Department reporting the addition of 222,000 jobs in June. With this report, average monthly job growth for the first half of 2017 was just under 180,000. The lack of inflation seems to be growing concern for investors—the annual rate of inflation hit an 8-month low in June of 1.6%, despite a jump in energy prices.
Equities: U.S. stocks gained just over 2% in July as measured by the large-cap benchmark S&P 500 Index. Monthly performance was even better for the Nasdaq Composite Index, which rose over 4% in July. Equity investors continued to push the major indexes to new highs, encouraged by good news on Q2 earnings for many large U.S. corporations. According to FactSet, over 70% of companies that have reported Q2 earnings so far have beat analyst expectations. But positive earnings didn’t shield all firms from outside risks—in particular tobacco-giant Altria Group (MO), which saw its stock price fall over 10% on July 28 after the FDA proposed reducing nicotine levels in cigarettes to make them less addicting. The drop in tobacco stocks pinched performance for the consumer staples sectors for the month. The technology sector continued to shine, contributing nearly half of the S&P 500 performance in July.
|Verizon shares up nearly 9% for the month; AT&T climbed over 3.6%|
|Software, services and chip makers reported double-digit earnings growth for Q2|
|Oil prices rebounded to $50/barrel along with revenue and earnings growth|
|High-yield electrics remained in favor as interest rates declined for the month|
|Another stellar month for e-commerce and cable operators|
|Strong earnings from insurers outweighed weakness at the big banks|
|Gold and copper producers shined but chemical firms fizzled|
|Health care REITs weighed on performance, even as retail REITs rose for the month|
|Despite positive returns for biotech, hospitals and equipment makers declined|
|Tobacco stocks dragged on performance; large grocers and distributors led the sector|
|Building products and airlines were weak, but defense stocks bolstered sector returns.|
|Source for equity sector total return data: S&P Dow Jones Indices, Index Dashboard: U.S., July 31, 2017|
Bonds: More of the same ruled the day in fixed income markets during the month. The Federal Reserve took no action at its July meeting, as many Fed watchers had expected, while indicating it remains on track for one more rate hike to come in 2017. Recent weak readings of inflation have caught the Fed’s attention, and it noted in its statement after the July meeting that the central bank would be “monitoring inflation developments closely.” The Fed also committed to begin reducing its balance sheet relatively soon, as long as economic conditions pose no surprises. Rates on 10-year U.S. Treasury notes finished lower at month-end but yields for shorter maturities held mostly steady, reflecting some concern among investors about upcoming negotiations for the federal government’s debt ceiling. Continued strong demand for corporate bonds from yield-hungry income investors led to declines in yields for both investment grade and high yield credit securities during the month.
The Month Ahead: Investors seem unfazed by the D.C. drama, so a focus on the fundamentals of investment performance—economic growth and corporate earnings, primarily—should help the market avoid any politically-driven emotional reactions. Federal Reserve policymakers don’t meet again until September, and it’s unlikely there will be any further announcements regarding balance sheet reductions before then. August is typically a quiet month for the markets, but with volatility already touching low levels it’s hard to imagine how much quieter the market could get in the next few weeks.
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